Corporation Tax Bill, 1975 (Certified Money Bill): Committee Stage.
Question proposed: "That section 1 stand part of the Bill."
This seems an appropriate point at which to suggest that we might hasten the dispatch of a Bill which is very daunting for us to face in view of its detail and having regard to its nature. It is a new tax but it is in part a codification of an existing tax transferred to the entity of the company, the corporate entity. In part it contains, I think, amendments to the fundamental income tax code where applied to the company. In common with anyone else who is going to try to make a contribution here today I have tried to grasp the principle of the Bill and I have tried to go through it but we have not been helped by the fact that we have not had all the printed copies of the proceedings of the select committee to read but I would like to thank the Minister for his offer, which I took up, of giving detailed illustrations of the different sections. I understood him to say at the select committee's first meeting that the tax load will be similar and that there may be a small —I think about 1 per cent—addition. Would not all Members of the Seanad be particularly helped in our consideration of the sections if we knew from where this 1 per cent additional is coming? That is probably a net percentage because there are, as appears in various parts of the Bill, reliefs and they are very welcome. Perhaps these reliefs have been taken into account as an offset in discovering the 1 per cent.
That may mean, of course, that the 1 per cent is much more than the 1 per cent gross if account has been taken of the benefit to companies, for example, of relief. I take it 1 per cent relates to the tax load on the corporation and not to the collection of tax from the special treatment of this new identity of the distribution. I think that is not taken into account—that there will be a haul of tax under Schedule F or from the two combined. If the Minister did what I suggest it would be a help. I do not ask the Minister to do this on this section; it might be too much to expect.
On this particular section, it is proposed not to include certain entities. These are listed in subsection (5). One particular kind of entity which might be included in the list are bodies enjoying body corporate status under the International Health Bodies (Corporate Status) Act, 1971. I had a quick look at that particular Act and section 2 describes it as having the function wholly or mainly of deliberating with the health of persons, of health insurance of the use and treatment of the sick or the administration of the health services, of medical and dental research. It did not seem to me that this would necessarily fall within the section dealing with charitable exemptions because of the use of the words in section 2 of that Act "wholly or mainly", but I imagine that the Minister will confer body corporate status on any such company. I know he has given it to a few. This would promote Ireland as a centre for international research. It would seem to me to be there would be the place to put the full exemption.
The company, as defined, includes all the special classes of companies as defined in Part III. These are industrial provident societies, building societies and so on; they are listed in sections 28 to 52. They are included because there is special treatment for them. It also includes all the companies in Part IV which are the export companies. It also includes those in Part V which are Shannon companies. In regard to both Part IV and Part V, the process connected with certain goods, process and trading within Shannon Airport, it seems absolutely relevant on this section to give advance notice that the House will be very concerned to see that in no way will the enactment of this measure adversely affect the investors in these companies or reduce their position, affect either the corporate entity or the distributions they received; otherwise we will be departing from what has been the practice since we entered the Common Market. As the Minister is well aware, it is not now merely a question of statute law but a matter of governmental obligation in the event of the export tax relief being withdrawn for any reason; likewise in the Shannon company.
There is another type of company— and again I give advance notice of this —which should be close to the Minister's heart because he introduced in this House the special provision which can only be enjoyed by a company benefiting from the packaging of exemptions here. I mention these points in anticipation that the sections will be looked at in advance by the Minister's advisers, to see whether for example, the relief from corporation tax which is provided in relation to these companies is sufficient where, for example, there is provision for a third charge on certain companies. For example in the case of an inventor, who must form a company which, according to the Minister's own dispensation, is a service company within the definition, if a 20 per cent surcharge is imposed where is the exemption from that surcharge granted to that particular company? There will be much more to be said in connection with section 162: one does not have to say it now.
Another point on this matter—is it the case with the Voluntary Health Insurance Board that only certain income is exempt, the income received from health insurance? Is this a pure codification so as to maintain precisely the position of the Voluntary Health Board? Would it not be a good thing in this case to make it an exemption and to list it "but does not include the Voluntary Health Insurance Board." If I may remind the Minister, on a previous Finance Bill I mentioned this question of the Voluntary Health Insurance Board and some explanation was given. I would now argue with the Minister that if local authorities, health boards, vocational education boards, committees of agriculture, and as I suggest, bodies incorporated under the International Health Bodies (Corporate Status) Act, 1971, are to be excluded, the Voluntary Health Insurance Board should be moved from the section where it is given special treatment, section 80, and be made exempt for all their income. If they manage to invest some money, buy a stallion, for instance and do something wonderful with their money, who will benefit only the insurer because all the money the Voluntary Health Board make from any of their activities must come to the relief of the payers of voluntary health insurance? I suggest that point to the Minister.
One is referred by section 1, by implication and inevitably to section 155, where there are most of the definitions. I do not know why they are not all put in section 1 rather than two-thirds of the way through. I understand that the meaning of subsection (3), as seems clear from the illustrations the Minister has provided, is that chargeable gains tax is chargeable at the same rate by a very ingenious device as under the capital gains tax. Is it premature to ask do they enjoy the same exemptions as they would have enjoyed previous to the existence of the capital gains tax?
Senator FitzGerald has covered quite a wide field under section 1. It shows what a comprehensive section it is. I would like to assure the House that I will do my best to act as guide as we move through the Bill and not mislead anybody, because it is a very comprehensive piece of legislation. Quite an amount of it, as Senator FitzGerald said, consists of adapting existing law in such a way as to make it apply for corporation tax purposes. As few changes as possible have been made in the law as it stands at present. The changes which are being made have already been indicated in the two White Papers published and in the explanatory memorandum.
As far as the revenue is concerned, it is not possible to say precisely what will be the effect, whether there would be a plus or minus. On the face of it, it would appear that the revenue would gain marginally because the rate of tax will rise from 49.5 per cent to 50 per cent, but this change takes place not with a view to increasing the revenue but as a necessary consequence of applying the tidier and more modern package of one company tax rather than maintaining the old system of income tax and corporation profits tax. Against that there are quite a number of heads where revenue will be lost by reason of a number of adjustments which are being made. For instance, there is more favourable treatment of small companies; we are raising the threshholds below which profits will be subject to corporation tax at a rate less than 50 per cent. We are also giving group relief under which losses sustained by companies in a group of companies can be set against the profits made by other companies in the group. By and large, the revenue impact will be neutral, but there will be significant reliefs for some companies and it is considered there are good business reasons for giving these reliefs. Some of them have been in operation already on a non-statutory basis since we published the last White Paper. On the other hand, we have deliberately moved to stop some tax avoidance practices in order to prevent a leakage of revenue.
Senator FitzGerald referred to the 1971 Health Act and the exemptions that are given to bodies set up under that Act. I would refer him to section 11 (6) which says that any income tax exemptions which are enjoyed at the present time will continue to be enjoyed and will have the like effect for the purposes of corporation tax.
The Voluntary Health Insurance Board are, as Senator FitzGerald said, dealt with in section 80 under which they will have the exemption which they at present enjoy. It is not proposed to effect any change. For instance, the Voluntary Health Insurance Board are not subject to tax in respect of their insurance activities, but they could be subject to tax in respect of their investments. To bring them within the ambit of the exclusions mentioned in section 1 (5) would confer total exemption from corporation tax.
There are a number of changes which I could understand Senators might like to urge should be made in taxation provisions. Such issues would be more appropriate to the annual Finance Bill where matters of current policy change in relation to the general impact of taxation. We have kept to the minimum the number of alterations which are being made in the tax code. There is a new suit designed, as it were; we have to put that on the whole corporate structure and made such adaptations as are necessary to fit out the new corporate taxation system, but otherwise we are not making changes.
As to definitions, Senators will find that virtually every Part of this Bill has certain definition sections. It was considered that it would be more helpful in an understanding of the Bill and more helpful to practitioners in applying the Act to have the definitions conveniently to hand for individual sections. As that was done, it was also necessary to have a more omnibus definition section and that, as Senator FitzGerald said, is available in section 155. It is very difficult to achieve total agreement on the proper way of handling definitions and as to the more appropriate location of definitions in Bills. But people will find the general handling of them in this Bill has made them more conveniently available than has been the case in other Acts in the past.
May I ask the Minister if harbour boards set up under the 1946 Act and trustee savings banks are excluded from the definition of "company" in subsection (5) of section 1?
Harbour boards are dealt with in Part VII of the Bill, as, indeed, are railway companies and canal companies. The question was raised in the other House whether they could possibly generate profits which would create liability. We have to assume that liability remote as it may appear.
Question put and agreed to.
SECTION 2.
Question proposed: "That section 2 stand part of the Bill."
May I ask a question on section 2? The section says:
Except as otherwise provided by this Act, corporation tax shall not be chargeable on dividends and other distributions of a company resident in the State ...
What would be the position with regard to a non-resident company that would be paying dividends out of profits already subject to corporation tax?
If I understand the Senator correctly, he is asking about non-resident companies making distributions. We are dealing only with distributions by resident companies and the Bill would not apply to distributions by non-resident companies.
Therefore, if a resident company had an investment in a non-resident company which derived profit from the branch or agency in Ireland which is subject to the corporation profit tax, it would pay corporation profits tax twice—first, because the company which declared the dividend paid it, and secondly, on its receipt of it. I thought there was a general bar against double taxation?
The double taxation arrangements between this country and other countries would ensure that there would be no double liability to tax.
What is "except as otherwise provided by this Act." Could we have a list of the sections which exclude section 2, by making corporation tax chargeable on dividends of a company resident in the State? The Minister might find it convenient to answer a question like that at a later stage.
I am happy to answer now because Senators might like to be able to refer to it so that they could absorb the meaning of the sections before we arrive at them. I refer the Seanad to section 38, page 43, section 41 (3) on page 44, and section 43 (2) on page 46.
That is an exhaustive list of the exceptions, as far as is known, subject to the point made by Senator Russell about the possibilities of the taxation in any case where we do not negotiate double taxation agreements.
There is no provision in the absence of such agreement to give the relief.
Does the question of export tax relief enter into this in any way?
The provisions in relation to export tax relief have been left unaffected by this Bill. We so say in the relevant section. That is one of the areas where the reliefs under the existing law are applied to corporation tax.
Question put and agreed to.
SECTION 3.
Question proposed: "That section 3 stand part of the Bill."
I am desirous to be educated on this section. Subsection (2) states:
Subject to the provisions of this Act, where after the 5th day of April, 1976, a company resident in the State receives any payment on which it bears income tax by deduction, the income tax thereon shall be set off against any corporation tax assessable on the company by an assessment made for the accounting period in which that payment falls to be taken into account for corporation tax (or would fall to be taken into account but for any exemption from corporation tax); and according in respect of that payment the company, unless wholly exempt from corporation tax, shall not be entitled to a repayment of income tax before the assessment for that accounting period is finally determined and it appears that a repayment is due.
Does that mean that if it gets at income from a dividend which is ripe for repayment, the repayment cannot be looked for until the corporation tax assessment has been made, if there is any question of repayment, in other words if the set-off is greater than the amount of corporation tax liability of the company receiving dividends?
We are not dealing here with dividends at all. We are dealing with payments such as rents and annuities. Under the existing law of income tax, annual payments such as annuities and royalties are not allowed as deductions in computing income for income tax purposes but the company have the right to deduct and retain income tax on those payments. For the purpose of corporation tax, annual payments such as annuities and royalties made by a resident company will be allowed as charges on income under section 10 and will have to be paid under deduction of income tax which the company will be obliged to remit to the Revenue Commissioners under section 151. Interest, whether annual or not, paid by resident companies for the purposes of a trade or a business of letting property will not be a charge on income but will continue to be allowable as a deduction in computing the income. Annual interest and short bank interest will be allowed as a charge on income under section 10, subject to the same restrictions as apply under the existing law. Annual interest which is allowed as a deduction in computing income, and other annual interest whether allowable or not as a charge on income, will be payable under deduction of income tax and the tax so deducted will have to be remitted to the Revenue Commissioners under section 151.
Is that precisely the present state of the law? There was a change in the law, I think in the Finance Act of 1974. Does this repeat for the corporate entity the previous position or does it effect a change?
This is the law as it now is. It would be post-1974.
Does that mean that if a company deduct tax within six months after the end of the financial year that tax must be paid to the Revenue Commissioners within six months?
It must be paid six months after the end of the accounting period in which it is deducted.
If it is not paid it is subject to interest?
Can a company claim repayment before the end of the six months, and if it is not settled promptly by the Revenue Commissioners are they entitled to claim interest on the delayed refund?
It is only after an assessment has been made that it can be established whether there is a right to repayment. I am sure the Senator will be quite pleased to know that the Exchequer is not required to pay interest on such repayments.
Question put and agreed to.
SECTION 4.
Question proposed: "That section 4 stand part of the Bill."
This section secures that where, because of exemption from that tax a company are entitled to recover income tax deducted from any annual payments received by them either by way of set-off against corporation tax liability or by repayment where the income tax deducted exceeds that liability, recovery of the income tax to be effected by means of a claim, to which the provisions of section 432 of the Income Tax Act, 1967, will apply.
Where does that apply? Is there a time limit on it?
Section 432 of the Income Tax Act, 1967.
Where in this Bill is section 432 applied?
Section 146 of this Bill.
That applies to corporation tax. If I understand what is happening under section 3, the tax which they are paying is not corporation tax.
But we are giving effect to section 3. The Minister is saying that the way to get back the money is by making a claim. Then he says the way this is done is by applying the provisions of Part XXVI of the Income Tax Act for the purposes of corporation tax as it applies to income tax. The tax which is being paid under section 3 is not corporation tax but income tax. Does the same apply to section 146?
You get back the income tax by making a claim to which the provisions of section 432 of the Income Tax Act, 1967, will apply.
Section 2 says:
For years of assessment after the year 1975-76 the provisions of the Income Tax Acts relating to the charge of income tax shall not apply to income of a company (not arising to it in a fiduciary or representative capacity)
Therefore the Income Tax Act is not applied.
In section 4 we are giving effect to section 1, which provides that resident companies are not to be liable to income tax.
I am sorry to be bothersome, but what you are looking to get back under section 3 (2) is income tax. The Minister is saying that a company are taken care of by section 146 but section 2 says that the Income Tax Act does not apply. Subsection (2) says "or otherwise provided in this Act". Does that not mean the income tax provisions of the Income Tax Act, because you are applying the provisions of the Income Tax Act to the income tax which the corporation affected are now trying to get back.
We are dealing with claims for the repayment of income tax, not the repayment of corporation tax. Therefore we are applying the provisions of Part XXVI of the 1967 Act.
If the draftsmen are satisfied, then I am satisfied.
Question put and agreed to.
Section 5 agreed to.
SECTION 6.
Question proposed: "That section 6 stand part of the Bill."
This is the section which sets out the general scheme of the corporation tax. It provides for the taxes to apply to the profits, that is, income and chargeable gains, wherever arising. The tax will be assessed on the company for each accounting period on the profits arising in that period. The rate of corporation tax will be fixed for each financial year. Where an accounting period does not coincide with the financial year, the profits will be apportioned between the respective years. The tax will be payable in two equal instalments on dates broadly corresponding to the present dates of payment of corporation profits tax and income tax.
Is this the section in which you get a little more dough? Was I right in thinking that a company resident in Ireland was liable to income tax but not necessarily to corporation profits tax?
I am not certain that I understood Senator FitzGerald's question. A company carrying on business here is liable to both corporation and income tax.
I thought they could only be so liable if they had a place of business here. For example, if they are managed and controlled here and own a factory in another country they were liable to income tax but not to corporation profits tax in respect of that foreign branch.
They would be liable to both taxes, but of course might enjoy relief under the double taxation agreements in respect of their operations outside this country.
This is no change. I have to give notice of an intention to refer to this again on Report Stage.
Does it mean the second instalment would be paid on different dates depending on the type of income of the company?
The existing pattern of payments is being preserved.
This covers both income subject to corporation tax and income tax and corporation profits tax. May I indicate the reason for my confusion? Section 6 (4) (a) says: "except as otherwise provided by this subsection", and then it goes on to say corporation tax will be payable in two assessments. That would indicate to me that other sources of income were paid at different periods, which seems to confuse the issue.
Under existing law, for a company it is always 1st January, but it can vary for an individual and we are preserving the same pattern of payments.
Maybe the confusion arises because there are two types of taxes involved here. Subsection (4) (b) states:
Where, in respect of a source of income, a company is within the charge to income tax under Schedule D...
In other words, this section is providing for the payment of two types of taxes and I am asking whether they are payable on different dates. If so, this could lead to some confusion.
The corporation tax is a blend of income tax and corporation profits tax. All that subsection (4) (b) says is that if a charge arises under Schedule D for 1975-76 then the payments will be as provided for under section 4.
Is it for that year or for all years?
Subsection (4) (b) provides an alternative date for payment of the second instalment, where a company are assessed to income tax for the year 1975-76 in respect of a source of income on the basis of the income arising in the preceding year, and they can therefore be regarded as having established a pattern of payment. For such a company the date of payment of the second instalment of the corporation tax for the first accounting period, where that accounting period is one of 12 months, will by virtue of clause (I) of subparagraph (i), be January 1st, 1977. Clause (II of subparagraph (i) secures that, where the first accounting period within the charge to corporation tax is a period of less than 12 months, the interval between the end of that accounting period and the date on which the second instalment becomes payable will be the same if the first accounting period were a period of 12 months.
Subparagraph (ii) secures that for accounting periods, regardless of their length, subsequent to the first accounting period coming within the charge to corporation tax, the second instalment of tax will become payable within the same interval from the end of the subsequent accounting period that would be applicable in the case of the first accounting period, if the corporation tax for the first accounting period were assessed on the date following the end of that accounting period. This formula will ensure that the interval between the end of any accounting period subsequent to the first accounting period and the date of payment of the second instalment of the tax for the subsequent accounting period will be the same as the corresponding interval would have been for the first accounting period if the tax for that period had been assessed at the normal time and not at the time it would bring into play the second part of the proviso to paragraph (b) which deals with the payment of the second instalment in cases where the assessment for the first accounting period is not made at the normal time.
Question put and agreed to.
SECTION 7.
Question proposed: "That section 7 stand part of the Bill."
This section concerns the case of a company in liquidation. It enables an assessment, or an estimated basis if necessary, to be made, for an accounting period beginning on or after the commencement of the winding up, before the end of that accounting period. It is a necessary practical and pragmatic provision.
Otherwise the thing could go on for five years.
Difficulty in achieving finality.
Question put and agreed to.
SECTION 8.
Question proposed: "That section 8 stand part of the Bill."
This section lays down the scope of the charge to corporation tax in the case of non-resident companies. In order to be chargeable to corporation tax such a company have to be carrying on a trade in the State through a branch or agency. In that event they will be chargeable not only on trading income arising directly or indirectly through the branch or agency but also on any income arising from property or rights of the branch or agency and on any chargeable gains attributable to the branch or agency in respect of disposals on or after April 6th, 1976.
If the company have not a branch or agency here they are not subject to corporation tax?
But remain subject to income tax if they trade in the State rather than with the State?
They could have other incomes such as bank interest which could give rise to income tax.
If the trading operations are carried out here without a branch or agency?
There are several ways of trading. The distinction here is a non-resident company trading with this country which, of course, they could do in the ordinary process of export sales to this country, but that would not generate a liability to pay tax here. But if they have a branch or agency here, that branch or agency are conducting business in this country and then the liability to corporation tax will arise in respect of the operations by the branch or agency in this country.
Would the Minister qualify what a branch or an agency is? Would there have to be a majority owned by the parent company? An agency is a rather wide term.
Page 138 of the Bill contains a definition—I am not saying it will help Senators—"a branch or agency means any factorship, agency, receivership, branch or management".
What does that mean in layman's language?
It is a matter of interpretation of subsection (5) of section 155. What constitutes an agency is something which is very difficult to define and it has to be looked at in respect of each particular case, and the Revenue Commissioners have to be satisfied that there is such a presence and activity that it constitutes a branch or agency.
An agency is normally understood to mean that somebody puts a brass plate outside his door and calls himself an agent for some outside company. Is he regarded as a bona fide agency for the purposes of this Bill?
It depends, I suppose, on the number of brass plates on the door. If the person in question was carrying on the profession of a general agent for a number of principals then such presence would probably not be regarded as a branch or agency of a particular principal, but if a person was an exclusive agent of a principal then it certainly would give rise to stronger suspicions that an agency or branch existed here. That is why the facts of every case have to be examined to see whether the case for tax arises.
On this business of the foreign company, was it the law, or has it been changed, that you could not tax the recipient of a dividend, you could not make an assessment on the recipient of a dividend? You could get at it by the company paying it and would be obliged to make a deduction. With regard to interest, for example from deposits in Irish banks to foreigners, is it the position that unless they can establish somebody here as being the agent of the foreign recipient there is no machinery to make an assessment? That position remains unaltered?
This new Schedule F does not give rise to any direct charging on the recipient of the dividend?
Dividends backed by Irish companies will be assessed to income tax under Schedule F.
It would not apply to the interest?
Question put and agreed to.
SECTION 9.
Question proposed: "That Section 9 stand part of the Bill."
This is to the effect that a company are to be assessed and charged to corporation tax for every accounting period on all profits arising in that period and the section also contains rules determining when an accounting period begins and ends.
I refer to the second paragraph of subsection (7). This is going on at the moment in the courts, I think, if that is what the Minister is thinking of. Is this a winding up such as we heard this morning is taking place in a certain bank under the Central Bank Act and are there others?
I would not like to make any specific reference to any matter which is now sub judice. I think Senator FitzGerald is seldom wrong. There could also be cases of chartered bodies which would not be companies to which the Companies Act, 1963, would apply.
I think you will find that the Companies Act, 1963, does apply. It certainly applies, for example, in relation to the winding up of building societies, though people were very surprised to learn that last year.
The second paragraph of subsection (7) is very comprehensive. I think it is desirable to have it there so that no occasion could arise if some activity might be outside the Companies Act, 1963. It is better to have a comprehensive omnibus clause like that than to leave the matter in doubt.
Question put and agreed to.
SECTION 10.
Question proposed: "That section 10 stand part of the Bill."
I read and re-read this section but I do not understand it.
Subsection (1) reads:
In computing the corporation tax chargeable for any accounting period of a company any charges on income paid by the company in the accounting period, but not before the 6th day of April, 1976, so far as paid out of the company's profits brought into charge to corporation tax, shall be allowed as deductions against the total profits for the period as reduced by any other relief from tax other than group relief.
Subsection (2) reads:
Subject to the following subsections and to any other express exceptions, "charges on income" means for the purposes of corporation tax payments of any description mentioned in subsection (3), not being dividends or other distributions of the company, but no payment which is deductible in computing profits or any description of profits for purposes of corporation tax shall be treated as a charge on income.
Charges on income so far as it is paid out of the company's profits charged to tax under subsection (1) are deductible. We get a list of those in subsection (3).
I might be able to satisfy the Senator with an explanation.
Subsection (5) states that no such payment made by a company as is mentioned in subsection (3) shall be treated as a charge on income if:
(b) the payment is not made under a liability incurred for a valuable and sufficient consideration and, in the case of a company not resident in the State, incurred wholly and exclusively for the purposes of a trade carried on by it in the State through a branch or agency:
Provided that for the purposes of paragraph (b) a payment falling within section 439 (1) (ii) or (iia) of the Income Tax Act, 1967...
These are payments to a university college in the State for the purposes of enabling such university college to carry on research and being paid to any body or persons to which the provisions of section 19 of the Finance Act, 1973, applies. Section 19 of the Finance Act, 1973, brings in an extension of that, I think. Yes, thalidomide children, which is very right. Does it bring in human rights? That surely comes into the 1974 Act. That is one of my points. Paragraph 439, I think, is a misprint.
That should be section 20 of the 1973 Act and not section 19.
By bringing in 439 (1) (ii) and (iia) you bring in as well 439 (2), because it extends and gives meaning to these payments under section 439 (2).
What about section 21 of the Finance Act, 1973? Where does the amendment appear? This was an amendment the Minister himself proposed, where a person carries on a trade or profession and pays any sum to an Irish university for the purposes of enabling universities to undertake research or engage in the teaching of approved subjects and the sum so paid is not income to which section 439 of the Income Tax Act applies. Maybe the Minister could show it to me in this massive document.
Can I take it that because of the misprint in section 439 payments in respect of thalidomide children do not arise? They do not arise because the payments are made by the foundation referred to in the section. I am sure the Minister will be able to tell the House about sections 20 and 21.
I will deal with the amendment first which is contained in subsection (5), the proviso to subsection (5). Section 11 of the Bill applies income tax principles to the computation of income, and the whole section generally applies the income tax code, including the exemptions. This, therefore, brings in sections 20 and 21 of the Finance Act, 1973. The effect of the amendment which was moved in the Dáil Special Committee is to maintain the benefit of the existing exemptions which are granted in respect of covenanted payments for research, teaching of the natural sciences and the promotion of human rights and freedoms. They will enjoy, under the corporation tax code, the benefits which they previously enjoyed in respect of the income tax code. Such payments, of course, are not ordinary expenses in the course of trade. That is why they have to be referred to separately in the Bill. Income Tax Acts set out the ordinary deductible expenses and so on which would apply to ordinary business affairs or ordinary deductions in the course of trade or business. As payments for charitable purposes are not payments which are made in the ordinary course of trade, they must be dealt with separately.
This section sets out the regulations in regard to the deduction of interest and the computation of profits. Is it correct to assume that interest paid within the State is deducted and interest paid to an outside resident company or person is not deductible?
Subsection (3) of section 12 deals with payments of interest. This does not limit the deduction of yearly interest to payments within the State as the originally drafted Bill so provided. It was amended.
Would the Minister clarify this point about the limitation to £2,000 per annum in subsection (6) (a)? Does this apply to interest paid on money raised outside the State and is there an effective limitation?
Subsection 6 limits the amount of interest and provides the amount which is to be treated as a charge on income will not exceed the lesser of (a) £2,000 per annum— this corresponds with the limit fixed by section 496, subsection (2) (b) of the Income Tax Act, 1967, in respect of interest other than interest deductible in computing income under Case I, II or V of Schedule D —and (b), in relation to a company which is connected with another company or an individual, an amount which bears to £2,000, or to an appropriate fraction of £2,000 where the accounting period is less than 12 months, the same proportion as the interest payable by the company bears to the total amount of interest payable by the company and the persons with whom it is connected. This corresponds with the provisions of section 38 of the Finance Act, 1974. There is a provision excluding from this restriction any interest which may be deducted in computing income under Case I, II or V of Schedule D, and any amount of interest which, though not deductible in computing income under Case I, II or V of Schedule D, is allowable for income tax purposes without restriction under section 496 of the Income Tax Act, 1967. The interest payments in question are those to which sections 32, relief on certain bridging loans, and 34, relief to individuals on loans applied in acquiring interest in companies, and 36, relief to individuals on loans applied in acquiring interest in a partnership apply.
What does that mean in layman's language? What is the effect of this limitation on the £2,000? Does that mean that a person cannot pay more than £2,000 in interest borrowed from an associated company in England—that only that amount would be allowed in computing profits?
There is no limit if the loan is for a business purpose. If the loan is for an investment purpose related to personal investment, then there is a limit. This provision in the 1974 Finance Act was for the purpose of putting a limit on the amount of interest which could be set off against ordinary income tax liability. It does not apply where borrowing is made for trading purposes.
Let us take an investment company as an example. Can it be allowed £2,000 per year interest?
For example, is a property company still developing limited in its interest factor? I thought that was the intention but was not finally done because so many property companies are already very highly geared with borrowings and if they were disallowed their interest for corporation tax it would be a disaster.
Such cases fall to be dealt with under Case V and interest would be allowed in such cases.
Even if the interest in a particular case was payable to a parent company which might be the primary security for all the funds borrowed by that company for the purpose of financing a subsidiary? A parent company liable to an insurance company for 10 per cent, 12 per cent or 15 per cent, or whatever might be the negotiator of the loan and only through that company could the borrowing be made. It obviously could not afford to lend it to its subsidiary. It might be a subsidiary within the terms of the Bill. There are many companies with minority interests, and many companies like to have Irish interests and associations with them. I would just like to be sure that the foreign interest element in such a situation is not disallowed. That could have a very bad effect on trading.
The payment of interest to a non-resident parent company is dealt with under section 84, but it would not enjoy the same treatment as is meted out to payment of interest to an Irish parent group.
What is the thinking behind this restriction? Is it to stop the parent or resident company, an outside company, charging excessive interest?
We will be dealing with this more fully when we come to section 84. It might be more satisfactory if we dealt with it there, as one of the issues involved is quite close to it.
Question put and agreed to.
SECTION 11.
Question proposed: "That section 11 stand part of the Bill."
This section lays down the general rule that the amount of any income to be brought in to charge to corporation tax is to be computed in accordance with income tax law and practice. Income from each source so computed and any gains chargeable, computed in accordance with section 13, are to be aggregated to arrive at total profits to be charged to corporation tax for an accounting period. In computing income no deduction is permitted for dividends and other distributions.
In regard to subsection 7, what does it do?
It is concerned with the computation of income from foreign securities and possessions.
A company is domiciled where it is incorporated. The remittance basis could not apply to a company incorporated here, but you could have a foreign corporation resident here. For example, take the export tax relief. That does not have to be done by an Irish company or any body corporate whether established to carry on business here, but it could be managed and controlled here.
Surely it is only going to be taxed as heretofore on remittances it makes from foreign earnings as distinct from the turnover of the company which is entitled to the export tax relief. This seems to say that it shall not have effect so as to apply. If we look at section 76 of the Income Tax Act, would we know what we are talking about? I am aware of some companies who have chosen for particular reasons not to incorporate themselves here. Subsection (1) shall not apply to any person who satisfies the Revenue Commissioners that he is not domiciled in the State. All he has to do is to produce a certificate of incorporation according to the law. If he does that, subsection (1) would then not apply and he would not be taxed save on a remittance basis. This could have a very adverse effect on companies which have established themselves here to do the business they are doing here. For example, they might be companies entering into partnerships, joint ventures and so on, and they might not want to establish for their own tax reasons, for their own internal commercial reasons, an Irish corporation. They might have to work on the basis of a foreign company; they might have to finance it here; their arrangements might be that they want to remit to this country their foreign income. Is that not something to be encouraged? Is this not a change in the law of some importance which may not have been assessed because there is not sufficient information available? I speak with knowledge of at least two companies which are carrying on substantial industrial ventures in this country, giving substantial employment, and are not incorporated in this country. If they have foreign incomes, they will run like mad if their foreign incomes are to be subject to taxation here.
Again, relief from double taxation——
Some of the companies are not just domiciled in countries with which you are going to make double taxation relief agreements because there is not any tax arising in these countries. I should like the Minister to have another look at that.
The Revenue Commissioners have never come across any case of the kind visualised by Senator FitzGerald.
I will ask them to rely on me that there is certainly one company, if not two, that chooses to carry on business in this fashion. I cannot see what the danger is. It is a change in the law. What is the justification for the change in the law? Subsection (1) of section 76, is not applied to any person who satisfies the Revenue Commissioners that he is not domiciled in the State. The only company which is domiciled in the State is a company incorporated in the State. There is no doubt about that. It is an indisputable proposition of law. Why therefore in the case of the company—and this only applies to corporations—should we change what is the law? I suggest that you delete it. Have a look at it and bring it into the Finance Bill, which is coming up fairly soon.
The essential element in taxation in relation to companies is not domicile but residence. The section to which Senator FitzGerald refers is dealing with domicile, but tax liability arises in relation to residence. The effect of subsection (7) of section 11 is to prohibit the deduction of foreign charges in computing foreign income. The charges are afterwards allowed as charges on income.
I think the matter is of such importance that I shall have to read subsection (3) of section 76 of the Income Tax Act:
...any person who satisfies the Revenue Commissioners that he is not domiciled in the State, or that, being a citizen of Ireland, he is not ordinarily resident in the State...
A person, of course, is a company. A company will immediately satisfy the Revenue Commissioners that he is domiciled elsewhere if he produces a certificate of incorporation elsewhere.
Subsection (3) of section 76 says:
In the cases mentioned in subsection (2)——
that is, the companies domiciled abroad
——the tax shall...be computed on the full amount of the actual sums received in the State from remittances payable in the State, or from property not imported, or from money or value arising from property not imported, or from money or value so received on credit or on account in respect of such remittances....
That is varied by section 4 of the Finance Act, 1971, which captured these notional remittances. If we are codifying income tax and making as few changes as we can, why take away the benefit which has been in existence since 1925 for bodies corporate in this country being so domiciled? This is serious. It may be primarily designed for individuals. The reasons for its existence are many. For example, in your codification of the export tax relief, the Shannon code, you are clearly not changing the requirement. It has got to be a corporation and it could be not an Irish corporation. For the vast majority of cases I am quite sure they are domiciled here and they like to look as Irish as they can. If there be one body corporate in this country which is here because it can avoid paying tax on remittances not received here, let him stay here. He would be paying solicitor's fees anyway. Why change the law without knowing why we are doing it? I always try to make changes which are justified where tax avoidance is known about. The Minister has told us that the Revenue Commissioners do not know of any such cases at all. Therefore it cannot be tax avoidance that is bothering him.
It would be my duty to tell the Revenue Commissioners of any such cases. I believe they exist. I can verify that further as a general statement. I know they were in contemplation in certain cases. There was this privilege that if they had income from foreign possessions they did not remit it here and were not liable to tax on it. If the Revenue Commissioners were not aware of the existence of such companies they cannot be worried about tax avoidance.
The Minister has time between now and Report Stage to consider this matter. For reasons of convenience we have to get this through before the 5th April. What date does it have to be enacted by?
I think it is the 28th March.
This is the 24th. Reprinting that page would be the easiest thing in the world.
It is more than a matter of administrative convenience; I object to the suggestion made by Senator FitzGerald. The liability to tax is set out in section 6, which says:
A company shall be chargeable to corporation tax on all its profits wherever arising
There cannot be any serious dispute that the appropriate test for tax liability is residence, where business is being conducted. The effect of acceding to Senator FitzGerald's suggestion would be to create a very convenient avoidance practice. That would be against the spirit of the Bill. On that account I could not see my way to acceding to the suggestion that we should delete subsection (7).
The Revenue Commissioners have said they are not aware of any such companies. We are not opening any door. We are just changing the law. We would be giving employment by printing if the extra page had to be reprinted. Some of this has to be changed anyway.
It is not a question of opening a door. It strikes me that the door is already open and I would prefer to shut it. To monitor the situation if difficulties arise there would be no difficulty in providing for retrospective relief. I would prefer to do that than provide a system under which, leaving the door wide open, avoidance practices could be easily engaged in. I undertake to watch the situation. If any cases come to notice which require corrective action I will not be a coward in coming forward.
I do not know if any other Senators would like to contribute on this.
Question put and agreed to.
SECTION 12.
Question proposed: "That section 12 stand part of the Bill."
This modifies section 11 in some way?
It does. The date on which a company begins, or ceases, to carry on a trade or begins or ceases to be within the charge to corporation tax in respect of it, is to be taken to be the date of commencement or cessation of the trade, as the case may be, even though the trade was previously, or may thereafter be, carried on by someone else. Annual interest will not be prohibited by section 11, subsection (5) (b), as a deduction in computing trading income. Expenses of management of mineral rights will be allowable in computing income from the letting of those rights, subject to the same restrictions as in the existing income tax relief.
The income of an Irish resident company from a trade carried on wholly abroad, although chargeable under Case III of Schedule D, will be computed in accordance with the rules of Case I of Schedule D. Foreign income tax will be allowable as a deduction from income from foreign securities and possessions. It is also provided that foreign income, mainly rents, interest and dividends arising to a non-resident company from property attributable to a branch or agency through which the company trades here will be chargeable to corporation tax under Case III of Schedule D in the same way as a resident company will be charged on such foreign income.
Question put and agreed to.
SECTION 13.
Question proposed: "That section 13 stand part of the Bill."
This is a very clever formula. Where are the exemptions? Do you take the chargeable gains definition in the Capital Gains Tax Act? There are certain things which are not chargeable gains. For example, Government and other securities not being chargeable gains under the Capital Gains Tax Act are not chargeable gains under this. There are certain exemptions and reliefs but they are gains of only £500 and other chattels sold for less than £2,000. These are beneficial only if they are made to a person, is that correct?
Is the corporation tax to apply to the Central Bank? Is there special provision for that?
It must be provided that the chargeable gains in the Central Bank could not be subject to the Capital Gains Tax Act.
The Central Bank Act exempts the Central Bank from tax liability.
Why is it listed as (e) in section 23 (1) of the Capital Gains Tax Act? Does the exemption of the Central Bank Act take in the corporation tax?
There is no capital gains tax chargeable on the Central Bank.
There is no corporation tax either.
No, the income tax exemptions which apply to the Central Bank are by virtue of this Bill maintained.
What about trade unions? Are they just getting the special treatment?
They continue to enjoy all exemptions which they have at present.
The payment from income tax is exempted from chargeable gains also?
Question put and agreed to.
SECTION 14.
Question proposed: "That section 14 stand part of the Bill."
This provides a new basis for giving capital allowances. The section provides that capital allowances, including accelerated capital allowances, and balancing charges, computed in accordance with the income tax provisions as these are applied to corporation tax by section 21 and the First Schedule, are to be deducted from or added to the income to which they relate. Capital allowances, to the extent that they exceed the income—other than trading income—to which they relate, may be carried forward and deducted from income of the same class for subsequent accounting periods. Alternatively they may be set off against other profits of the same accounting period, or carried back and set off against profits of any description of the immediately preceding accounting period or periods of the same length.
This is a section that anybody interested in industrial progress should welcome. It is an improvement on the existing provision. I note that subsection (8) has even extended the period of claim by a full year.
Question put and agreed to.
SECTION 15.
Question proposed: "That section 15 stand part of the Bill."
This section provides for the deduction, in computing profits for corporation tax purposes, of management expenses of resident investment companies, including savings banks, disbursed on or after April 6th, 1976. Expenses disbursed before that date will be relieved from income tax under section 214 of the Income Tax Act, 1967, which is being repealed by the Third Schedule with effect from 1976-77. Transitional relief is provided by section 186 and the Fifth Schedule.
There is also a change in the law here in that any shortfall in relief in one year can be brought forward. Can it be brought forward indefinitely?
The time limit again for making claims is two years instead of one?
That is two years from the end of the accounting year.
Question put and agreed to.
SECTION 16.
Question proposed: "That section 16 stand part of the Bill."
This section, broadly speaking, incorporates the loss reliefs already available as respects income tax under sections 307 to 309 of the Income Tax Act, 1967, and as respects corporation profits tax under section 25 of the Finance Act, 1964. It provides that trading loss may be carried forward from an accounting period to be set off against income of the same trade for a later accounting period. Alternatively, it may be set off against profits for the accountancy period in which the loss was incurred or of the period immediately preceding the period.
This again is a substantial change in the law, is it not?
Is it not? Does it not push back losses?
For one year immediately preceding, not any more.
Question put and agreed to.
SECTION 17.
Question proposed: "That section 17 stand part of the Bill."
The section is designed to apply to corporation tax provisions similar to those applicable to income tax under section 27 of the Finance Act, 1974.
Question put and agreed to.
SECTION 18.
Question proposed: "That section 18 stand part of the Bill."
This section brings in, for corporation tax purposes, provisions corresponding to those relating to terminal loss which exists under the Income Tax Act, 1967.
Question put and agreed to.
SECTION 19.
Question proposed: "That section 19 stand part of the Bill."
This section makes no effective change in existing law.
Question put and agreed to.
SECTION 20.
Question proposed: "That section 20 stand part of the Bill."
This section provides a new relief. A concessional relief had been given on these lines for a number of years and we are making use of this occasion to provide it as a statutory right where there is no change in the ownership on the reconstruction of the company.
Question put and agreed to.
SECTION 21.
Question proposed: "That section 21 stand part of the Bill."
This section applies for corporation tax purposes the existing income tax system of capital allowances.
Question put and agreed to.
SECTION 22.
Question proposed: "That section 22 stand part of the Bill."
This section applies for corporation tax purposes existing double taxation relief provisions as they at present apply to corporation profits tax purposes.
Question put and agreed to.
SECTION 23.
Question proposed: "That section 23 stand part of the Bill."
This section provides rules for computing the corporation tax attributable to any income or chargeable gains in respect of which, under double taxation arrangements, credits for foreign tax can be allowed. It is necessary because under the Income Tax Act, 1967, as applied to corporation tax by section 22, the credit for foreign tax allowable for corporation tax must not exceed the corporation tax so attributable.
Have we got a double taxation relief agreement about capital gains tax yet?
You have a problem there. There are different rates.
What are you doing about it? What are you doing to Irish companies which have to pay 30 per cent of their profits on gains made in the UK?
I am encouraging them to invest their assets here so that they will have a lesser rate.
But, seriously, they would be liable to both taxes, would they not? I presume they are being relieved unilaterally?
In practice we will not allow double taxation liability to arise by virtue of any action of the Irish Revenue Commissioners.
I presume you have statutory provisions for this.
Yes. Care and management.
Question put and agreed to.
SECTION 24.
Question proposed: "That section 24 stand part of the Bill."
This section defines "franked investment income" and "franked payment". I do not think I can add anything to the explanation.
Question put and agreed to.
SECTION 25.
Question proposed: "That section 25 stand part of the Bill."
This section provides, where a resident company receives franked investment income in an accounting period and has losses, charges on income or capital allowances which because of an insufficiency of profits charged to corporation tax for the accounting period cannot be relieved against those profits, that it may claim to have the unrelieved losses and so on set off against the franked investment income for the period so as to secure payment to it of the tax credit comprised in that income.
Question put and agreed to.
SECTION 26.
Question proposed: "That section 26 stand part of the Bill."
This section provides for a set-off loss brought forward or terminal loss against franked investment income in the case of financial concerns. It makes no effective change in the law; it simply adapts it for corporation tax.
Question put and agreed to.
SECTION 27.
Question proposed: "That section 27 stand part of the Bill."
Does this leave the position unchanged?
This is similar to the provisions of section 29 of the Finance Act, 1973. It is to counter tax avoidance by means of "loss buying".
There can be reconstructions which are possible only if people invest their money in a situation where there is a history of loss. One of the attractions is that they get tax-free income for a while and companies and employees can be saved. A whole new crew will come in and the old gang will go out.
Of course, the Finance Act, 1973, for which I was responsible, took care of the genuine cases that Senator FitzGerald is genuinely concerned about. However, there cannot be any serious doubt but that the availability of "loss-buying" led to a number of artificial situations where people bought losses in companies which were conducting activities having no connection with or resemblance to the activities of the companies which bought the losses.
I agree completely with the desire to cut out tax avoidance. It was quite widespread, more widespread in Britain than it was here, but we have a limited market.
I am afraid we often pick up bad habits from Britain.
We have picked up some bad habits. I am considering two companies with masses of losses. The only hope for them is for a new crew to come in and take over and do somewhat different things, and that is provided for by the statute. It is not necessary to satisfy the Revenue Commissioners about it. I would not like to have to face into it as one of the tasks preliminary to a company reconstruction.
I can say that we are not making any changes in the existing structure or applications of the law. If there is need to adjust the existing system this would be more appropriate to a Finance Bill.
Question put and agreed to.
SECTION 28.
Question proposed: "That section 28 stand part of the Bill."
This section provides for the charge of corporation tax liability in respect of small companies where the total profits do not exceed £5,000 and for marginal relief where the profits are between £5,000 and £10,000. This is an extension of the relief at present available under corporation profits tax. To clarify, if you are making £50,000, the whole £50,000 is charged at the 50 per cent.
It does not matter about the first £5,000 or £10,000—there is no special rate?
Not where the profits exceed £10,000.
When it comes to the surcharges there are different sections where they are finely proposed in one section and monstrously proposed in another, does this section apply to them? If their profits are only £5,000 or up to £10,000 are they still capable of the surcharge? Maybe the Minister would like to answer that when he comes to the surcharge section.
I will deal with it when I come to it. The answer is in the affirmative.
I think it is a very good provision and I compliment the Minister for introducing it by way of giving some modest relief to small business. It is excellent. It says here in subsection (3) (a):
Where the company has no associated company in the accounting period those amounts are £5,000 and £10,000 respectively.
Does that mean this is purely applicable to a single company, non-associated with any other companies? If, say, one company makes £20,000 and the other company makes £5,000, is the second company not entitled to the lower rates of corporation tax?
We have to look to all associated companies so as to prevent abuse of the reliefs by the establishment of a number of companies under the same ownership, because that would be quite clearly a very convenient avoidance practice: to multiply the number of companies so as to keep the reliefs below the thresholds.
You did not have that already?
No, there was no restriction on the £2,500 relief, or whatever the figure is. One clearly has to have it. You look at the profit position of the respective companies and then you divide the reliefs available by the number of companies you have.
Would the same apply in the case of subsidiary companies?
Yes, they would be associated irrespective of the type of association.
Question put and agreed to.
SECTION 29.
Question proposed: "That section 29 stand part of the Bill."
This section deals with distributions made by a company carrying on mutual business or not carrying on any business. It provides that distributions made by a company are not to carry tax credits except to the extent that distributions are made out of profits charged to corporation tax or out of franked investment income. The section ensures that a tax credit will not be given in respect of a distribution made out of a surplus arising from mutual trading as such a surplus would not attract a liability to corporation tax. However, other income of a company carrying on a mutual trade, for example, bank interest or investment income, will be liable to corporation tax and accordingly a tax credit will attach to distributions out of such income.
Question put and agreed to.
SECTION 30.
Question proposed: "That section 30 stand part of the Bill."
Section 30 modifies for corporation tax purposes the existing income tax provisions relating to the treatment of Industrial and Provident Societies.
It modifies for corporation profits tax purposes.
But it applies without modification of the principle.
Yes. It "adapts" might be a better description of it.
Question put and agreed to.
SECTION 31.
Question proposed: "That section 31 stand part of the Bill."
This is the section relating to building societies?
Question put and agreed to.
SECTION 32.
Question proposed: "That section 32 stand part of the Bill."
This section concerns the assessment to corporation tax of a company's partnership profits. The main feature of the existing income tax legislation is that a partner's share of the profits arising from a partnership trade is regarded as arising from a separate trade, carried on by him and he is assessed accordingly. This is being preserved under the corporation tax. The section is designed to secure that a company's share for an accounting period of the profits of a trade which it carries on in partnership with others is to be charged to corporation tax for that accounting period.
It is the same provision?
Question put and agreed to.
SECTION 33.
Question proposed: "That section 33 stand part of the Bill."
This section provides for relief in respect of management expenses to be given to life assurance companies. The relief corresponds broadly to that which is available to investment companies under section 15 of the Bill. The relief is similar to that which was provided for income tax purposes.
Question put and agreed to.
SECTION 34.
Question proposed: "That section 34 stand part of the Bill."
This provides for the separate assessment to corporation tax of an assurance company's life assurance business and its other insurance business. It also secures that in computing, for purposes of relief from corporation tax, a trading loss incurred in its life assurance business, the investment income of the life assurance fund must be taken into account.
Question put and agreed to.
SECTION 35.
Question proposed: "That section 35 stand part of the Bill."
Might I suggest to the Minister that where there are no changes——
There is no effective change. The position dealing with insurance matters has been discussed at length with the insurance industry and agreement has been arrived at.
That does not mean that there has been any change?
No; if there is change I shall tell you.
Were you proposing a change?
No; even the insurance industry agreed that there is no change.
Question put and agreed to.
Sections 36 to 39, inclusive, agreed to.
SECTION 40.
Question proposed: "That section 40 stand part of the Bill."
This is complementary to section 39 and there is no effective change.
Question put and agreed to.
Sections 41 to 45, inclusive, agreed to.
SECTION 46.
Question proposed: "That section 46 stand part of the Bill."
This maintains the existing position for corporation tax purposes.
Question put and agreed to.
Sections 47 and 48 agreed to.
SECTION 49.
Question proposed: "That section 49 stand part of the Bill."
There is no effective change.
What on earth does this mean "issued before the 6th April, 1974"? What happened on 6th April?
This section entitles a life assurance company to recover from a policy holder by deduction from the benefit payable on termination of his policy the capital gains tax attributable to the investments underlying the policy where the policy is an "investment-linked" policy taken out before the coming into operation of capital gains tax on 6th April, 1974. Subsection (1) indicates the policies to which the provision applies. There are life assurance policies taken out before 6th April, 1974, of a type known as "investment-linked" policies, which provide for benefits consisting either in whole or in part of investments of a specified description, or of a sum to be determined in accordance with the value of such investments, and which do not provide for deduction from the benefits of any amount on account of the tax payable by the company in respect of any chargeable gain accuring to the company on the disposal of the investments.
Subsection (2), which is the main provision, authorises the company to make an appropriate reduction from the benefits secured by the policy in respect of the tax payable by the company on the disposal, or deemed disposal, of the investment underlying the policy. The deduction to be made from the proceeds of the policy is not to exceed corporation tax at the full rate on the chargeable gain, reduced in accordance with section 13, subsection (1), on the disposals, or deemed disposals, of the investment.
This applies to what are called "with profits" policies?
To investment-linked policies.
Do not insurance companies manage to realise their investments so as not to have chargeable gains?
Yes, but from time to time they might, in fact, have gains which would be chargeable.
Question put and agreed to.
Section 50 agreed to.
SECTION 51.
Question proposed: "That section 51 stand part of the Bill."
This is a new provision. The section brings into charge to corporation tax foreign interest and dividends arising to a non-resident bank, insurance company or other person carrying on a business of dealing in stock, shares or securities in the State through a branch or agency where the foreign securities are attributable to the branch or agency. In the absence of such a provision income tax in the hands of non-residents under section 50 or section 462 of the Income Tax Act, 1967—exemption from income tax of certain dividends payable to non-residents—would be exempt from corporation tax because of section 11 which exempts from corporation tax anything which is exempt from income tax. This section also provides for a restriction of expenses in computing profits or losses or management expenses, where interest on certain Government securities, for instance, is excluded in computing income or profits for corporation tax purposes and the expenses are attributable to those securities.
Question put and agreed to.
SECTION 52.
Question proposed: "That section 52 stand part of the Bill."
This section prevents relief from tax being given in respect of interest on money borrowed for the purpose of a business carried on in the State by a non-resident bank, insurance company or company dealing in securities and used for the purchase of the exempt Government and certain other securities referred to in section 51. Such interest is not dealt with in section 51 (2) and is therefore dealt with as a separate matter by this section which provides detailed rules for its exclusion, in computing for corporation tax purposes, the Irish branch profits of such a company.
I do not understand that. You have provided that these securities which are being held by a person not domiciled or resident here are free of income tax and that privilege is not being lost or reduced in any way?
No. The privilege will continue; but what we are providing is that where such a privilege is enjoyed relief from tax will not be given in respect of interest on money borrowed for such securities.
We are going to tax them in a case in which they were previously exempt?
No. We are only going to deny under this section the relief which would be given in respect of borrowed money.
In this section I agree that the Minister is saying: You are not going to borrow money here, invest it in Irish Government securities, then come along and set off the interest on that borrowing against the profits of your branch. But under the section we were discussing earlier, it did not apply in section 76 of the Income Tax Act, 1967, to companies not domiciled here if they remitted their profits here for the purposes of buying your gilt edge securities. They are not domiciled, they are not resident here; you are going to say: "We shall tax you on that money". That will not be very good for Government borrowing.
If not resident here, they will not be charged.
Sorry. Section 76 gives an exemption to a company which is not domiciled here. It says in section 73 that tax will be computed on the full amount of the actual sums received in the State, remittances held by the State. However, having made the point already, I fully agree with this section anyway.
Question put and agreed to.
SECTION 53.
Question proposed: "That section 53 stand part of the Bill."
The effect of this section is that nobody will get less relief than they get at present and some, in fact, will get a little more. It is in ease of the taxpayer. The section defines the "relevant accounting period" for the purposes of export sales and provides, in effect, that export sales relief cannot be granted to a company for an accounting period in respect of a trade unless the accounting period falls within the 15-year period running from the latest of three dates. These three dates are October 1st, 1956, the date of commencement of the basis period for the first year of claim for income tax purposes, and if there was no such first year of claim, April 6th, 1975.
The definition contained in the section is to take the place of the definition of "basis period" for export sales relief for income tax purposes contained in section 398 of the Income Tax Act, 1967 and the definition of "accounting period" for export sales relief for corporation profits tax purposes contained in section 28, subsection (2), of the Finance Act, 1960, both of which are being repealed by section 164 and the Third Schedule. The definition of "company" in section 398 of the Income Tax Act, 1967, is not reproduced, as the general definition of company in section 1 will apply for the purposes of export sales relief. In the example I have taken the case of a company which commenced trading in January 1st, 1966. Under corporation tax the company in question has six more years of relief. If we had not this provision in the Bill it would have only four-and-three quarter more years of income tax relief and six more years of corporation profits tax. So, in fact, it is a net benefit of one-and-a-quarter years of income tax.
It means, in effect, that the tax free allowance on exports ends in 1990. That is the final date. The last effective date on which you can begin trading and get the 15 years' export tax relief is 6th April, 1975?
Question put and agreed to.
Section 54 and 55 agreed to.
SECTION 56.
Question proposed: "That section 56 stand part of the Bill."
There is no effective change in the law.
Under section 56, would a company mean a co-operative in this case. Selling to Bord Bainne or the Pigs and Bacon Commission will have the benefit of export tax relief?
Yes. Companies will get it but co-operatives can get the export sales relief or the relief available to co-operatives. They cannot get both.
I appreciate that. But when the Minister says "company" what type does he mean? Is it a private enterprise one as against a co-operative?
That does not apply obviously to any other type of export company such as, for example, Cow and Gate, who are established here and buy from co-operatives. In their case they would not be entitled to export tax relief? Does it only apply if they sell through either Bord Bainne or the Pigs and Bacon Commission?
That is a specific provision. They are regarded as bodies which are not themselves profit-making; they are simply channels for the more effective disposal of Irish exports. At one time as the House is aware, there was an obligation to sell to those bodies, but under EEC rules state monopolies are not permitted. However, it is considered desirable to maintain the incentive to operate through these channels so as to secure good marketing. That is why the particular provision is there. Obviously, export sales relief can be given only once. Therefore it is given to the actual exporter, except in relation to the specific exemptions which have been provided by way of incentives for the Pigs and Bacon Commission and Bord Bainne. It is presumed that if the ultimate disposer gets the relief it percolates back to the producer.
That is a much different and wider field altogether. If the exemption is removed from co-operatives which do not sell to either of these two bodies but to a company like Cow and Gate, they will not then be entitled to the export tax relief? Cow and Gate or some such firm will be entitled to it but not the contributing co-operative.
We are anticipating the statement of the Minister for Finance on that.
We are looking at the whole question of agricultural co-operatives and this will be one of the factors to be borne in mind.
Question put and agreed to.
SECTION 57.
Question proposed: "That section 57 stand part of the Bill."
It reproduces the Income Tax Act, 1967.
Question put and agreed to.
SECTION 58.
Question proposed: "That section 58 stand part of the Bill."
This maintains the effect of existing law.
Question put and agreed to.
SECTION 59.
Question proposed: "That section 59 stand part of the Bill."
This section maintains the existing law but the wording has been slightly amended to remove the doubt which exists as to whether a company which could claim export sales relief apart from this section would be entitled to elect to have manufacturing services which are rendered solely to persons resident in the State treated as goods for the purposes of export relief. The doubt is removed by the insertion in the opening part of subsection (1) of a condition that all or some of the manufacturing services must be rendered to persons not resident in the State.
The purpose of the section is to extend the export sales relief to profits and certain export sales of services. The relief may be claimed by a company which receives remuneration for the carrying out in the State any manufacturing process from materials belonging to a foreign concern where the materials have been imported into the State, provided that the finished products are exported out of the State while remaining in the ownership of the foreign concern? There are cases —clothing, for example—where the material remains the property of a foreign company which sends the material into the country and it is then processed here and then reexported. Now the relief has been extended to profits generated by that activity.
Am I correct in thinking that the Special Committee divided on this?
I think they did. I merely wanted to know what was against the provision.
The Senator might be right. I think to relieve boredom it was decided that——
I am sure there was some amendment.
Yes, there was an amendment in which the Opposition voted against the continuation of existing export sales relief.
I thought there was a division on section 59. My only interest is to know what is desirable.
No, it was section 60, on Tuesday 24th February.
Question put and agreed to.
SECTION 60.
Question proposed: "That section 60 stand part of the Bill."
I am not relating this to the point in the Special Committee Report. In regard to section 60, I appreciate that this is a repeat of the existing law in regard to relief in respect of engineering services. My suggestions would probably be more appropriate to a future Finance Bill, but perhaps the Minister would consider it, that is, to widen the scope of this relief. It is confined at present to engineering services. I approve of that because it is in this type of professional service area that we can make a real contribution, both in terms of fulfilment of the professional individual or companies concerned and also a real, indirect export. Our whole educational system is regared towards it and it is an area in which we are making good progress in many of the Third World countries in Africa and the Middle East. While I respect the relief in engineering services I suggest that it be broadened to cover the whole range of professional services, in which at the present time, with the developments envisaged with the Arab finances and which are taking place in Iran, Iraq, the Gulf States, Saudi Arabia, to mention but a few places, where there are Irish engineers engaged in chemical, civil, electrical or mechanical work. There are many Irish contracting firms involved in the preparation of projects throughout the Middle East. I should like to see the whole range of building services included—architectural, quantity surveying and so on—and not just engineering services. My objection is to the narrow definition of engineering services. There is a whole range of professional and technical and building services which can be and are being delivered in a package and which are being successfully carried out by Irish firms in the countries I have mentioned apart from the large scope existing in countries such as Zambia, Tanzania and Nigeria.
The Minister might consider, in preparing his next budget, broadening that considerably to include the whole range of professional services which we can provide through our university and technological institutions and where we can have a growing area of indirect benefit, both from the export point of view and from the point of view of job fulfilment and satisfaction.
I should like to support the pleas made by Senator Lenihan. When this relief was first given some eight years ago we appealed for the broadening of the definition, but the then Minister held it was just a pioneering scheme and that the broadening could be done when we saw the success of the initial effort. We are happy that the initial effort in the engineering field and so on has been an outstanding succes. The time has come now for the Minister to broaden this—not necessarily in the present Bill but perhaps in his next Finance Bill. The emergence of the EEC has also posed a number of questions, because there are research funds available within the EEC for doing somewhat similar type of work to that envisaged as being encouraged in this.
I should like to feel that work done for the EEC could be regarded as work done outside the State, even though the handing over of the results would not have the same physical sense as envisaged in section 60. It would be merely the publication of the results concerned or their transmittal to whatever central office the EEC had for this particular research project. There is money for research in the EEC and we should get our share of it. On the other hand, our research organisations are poorly endowed compared with similar groups within the EEC. Therefore, that makes it all the more necessary for the Government to do everything possible to ensure that those groups get every incentive to get after this work. In this field, I would hope that the development would see joint projects developing between the regional technical colleges and the university centres and indeed between other independent groups outside. There is a wide field here and I ask the Minister, "Let us go and get our share of it".
I am not unfriendly to the exhortations that have been made here but I would point out that the section is extermely wide. One should not look at the words of limitation so much as the very broad description of design and planning services which covers virtually every conceivable activity in relation to construction works of the type Senator Lenihan referred to. It has been broadly interpreted to cover everything from engineering to quantity surveying to draftsmanship and scientific work and so on.
Has it been so interpreted?
From the begining. We were exhorted to specify particular professions and I think that specifying particular professions might lead to the presumption that ones which were not mentioned were not included, and I thought it better to leave it as it is. I will certainly consider what has been said by both Senators. I will conclude with the thought that I fear the EEC might be the very body that might object to extension of the provision to cover works which might be done in the EEC. That is something we will not decide in the Seanad or in Dublin.
I appreciate that in practice it covers all the services relating to construction and building. It is still limited to that area. One can consider, for instance, medical developments in the way of hospitalisation, providing a package of medical and nursing services.
Question put and agreed to.
Business suspended at 1.05 p.m. and resumed at 2.30 p.m.
Section 61 to 63, inclusive, agreed to.
SECTION 64.
Question proposed: "That section 64, stand part of the Bill."
This section corresponds broadly with section 410 of the Income Tax Act, 1967, which provides for the deduction of income tax at a reduced rate from dividends paid out of export-relieved profits. However, the section contains a provision which has no counterpart in the existing export sales relief provision which will secure that where the distributions exceed the distributable income of the accounting period the tax credit in respect of the excess will be calculated having regard to any export sales relief for the immediately preceding accounting period. Where the profits of the latter period are insufficient, the balance of the excess will be treated, for purposes of computing the tax credits, as coming out of the profits of the next immediately preceding accounting period and so on.
Could the Minister explain why that is an improvement? At present a company could, and the Minister is very well aware that many companies do, simulate profits within the State for an indefinite period of time. The money they could distribute in certain cases that are not disclosed in any particular way but covered in a global disclosure of State accounts is lent to the Government. I take it that in no conceivable circumstances could a distribution under this section mean that a company were limited by reference to some activity of a preceding year or caught under the distribution provisions which treat certain distributions as not expenses.
Is it possible that an export tax relieved company could, under this section, find themselves in relation to certain distributions being able to treat them as expenses so that when they got into a situation where they were tacking the home market, for example, the availability of this expense would be useful and important to them? I tend to take the view, which I have expressed twice, once in this House and once on one of those rare occasions on which I speak through a box and I am thankfully unseen, that the growth in population is not something to disturb us. It creates problems for us, but viewing the thing historically if there is an element of growth in an economy, a growth in a population tends to accelerate the growth of the economy. I could see situations where the exclusion from the home market by virtue of an agreement under a grant, for example, might require to be varied by the company persuading the grantor of the grant to very it, or where there is not an exclusion to the home market where the company were not in competition with the local capitalist, they might choose to come into the home market and then be liable to tax.
Is the position under this section that if they did that they would find themselves limited by the fact that they had not distributed profit which they could have distributed, which they retained in Ireland for the benefit of Ireland, by either ploughing it back or lending it to the Government on Exchequer Bills or whatever type of negotiable instrument was agreed on between the Government and the company in question? If that is the position, I am sure the Minister will help us on that. I would be totally opposed to the adoption of the section with that variation and would suggest that the redrafting of this change in the law is obviously not of the kind which could be done in the time that we know the Minister has. There are other sections where the redrafting would be quite simple and the printing of it a small matter, but the redrafting of this involves professional time on a very extensive basis.
One could get this amended presumably in the Finance Bill, but as I read the section and as the Minister has explained it, it seems that it has this consequence. I think this ought not to follow as a consequence because if it is to this country's advantage that the export relieved companies who establish themselves here are encouraged to retain their profits here, as a very lage number of them do for various other reasons. It may not be for an idealistic motive such as moved everybody in the Seanad but for motives of material advantage to themselves but which inure to our advantage because this money is kept here. In one form or another it bolsters up the banking system. It is ploughed back. Such companies may make other investments and they may then come within the formula which may lead to a surcharge arising for them. If this sort of situation arose then it would not be true to say that we have not made a change which affected the undertakings we have given, some of which, since our entrance to the EEC, now amount to Exchequer obligations which it is our duty at least to recommend to the other House from which this Bill has come.
I do not think I disagree with the objectives the Senator has in mind but I fear I may not have quite followed his reasoning. The section is not referring to expenses at all. It certainly is not obliging a company to make a distribution nor is it discouraging companies from retaining their money here or reinvesting it here. All we are simply providing for in this section is a situation where a distribution takes place which is in excess of the profits which are available for distribution in that accounting period. If we left the section as it was it would mean that simply because £1 of profit enjoyed earned income relief it could——
Export sales relief, as it is called. That £1 alone could then colour or flood the total dividend. We are saying that in relation to the year in which the distribution takes place you look at the distributable profits for that year. If they are insufficient to cover the distribution which has taken place, then you look to the export sales relief for the immediately preceding accounting period. If that together with the distributable profits for the year in question is sufficient that is the end of it. If it is not you go back to the immediately preceding year until such time as you have a sufficient accumulation of profits to cover the distribution which has taken place.
I take the point the Minister is seeking to cover. I agree with him that if he finds any loophole in the existing arrangement which would mean that income could get distributed with the recipient of the dividend getting the benefit of a full export tax relief where in fact the company were paying home corporation tax on part of the sales, that it would be closed. I wonder if the formula is correct. For example, if you have a company which have been doing this business of exporting for ten years and then proceed to get into the home market there are very complex negotiations going on with these companies all the time. We are very conscious of any variation from this system of rights with regard to reliefs which encourages them. I wish the Minister, in his spending capacity, would be aware that much the greatest attraction in all our systems of incentives to investors here is the export tax relief and not the grant. The grant is negotiable always. If they have any doubts about the export tax relief they are out the door. You have no further conversations with them.
Can we see it so that the taxability of the recipient of the dividend relates to the total accumulated reserves and then their source, talking the total export turnover of the whole period of years and the total home sales, that it is that fraction only which the recipient of the dividend is caught by?
Our population is going up. As I tried to point out recently it was during the system of private enterprise encouragement that emigration stopped and the population growth began. Let us remember that. The projections for the future are based on something that has happened in the past. I do not expect the Minister and his advisers—God knows they have enough to do—to change this now. However, if the Minister finds that what I am saying is worth while —this is not a type of amendment which can be done between now and the Report Stage—he might deal with it is quickly as possible. A very important question of principal arises here with regard to economic policy.
I am prepared to examine it. The Senator may be assured of that. It is worth while remarking that no representations have been received on this matter but it may be only in the light of experience that people may have second thoughts about it. If and when any representations are made to us, we will be watching the situation very carefully.
The Minister will not disregard the contribution I made as not being a representation?
Question put and agreed to.
SECTION 65.
Question proposed: "That section 65 stand part of the Bill."
This section deals with the case where a tax credit, reduced in accordance with section 64, is in respect of a distribution to which section 178, that is, dividends at gross rates, applies. The latter section provides that an obligation created before 6th April, 1976, to make a fixed rate of distribution, for example, preference dividends, will as from that date be satisfied by payment of such an amount as will, with the addition of the normal tax credit in force on that date, be equal to the gross distribution which the company were previously obliged to make. The section requires the company to make a supplementary payment equal to the amount by which the tax credit as reduced under section 64, which is the import sales relief section, falls short of the normal tax credit.
I have no criticism of any kind but just a desire to comprehend how the surcharge with regard to the distribution of a company relative to the estate and investment income ensures that the export tax relief is in no way affected by the surcharge. Does the formula designed in this, indicated later on in section 178, ensure that? If the position is that a surcharge can arise— and I tell the Minister that I think it does arise—in such a way that somebody who has shares in an export tax relieved company can find a surcharge arising which will effectively at the time of the distribution deprive him of the benefit of the export tax relief, we have reneged on the investors in these companies. Let us face it, they are not all foreign companies. There are many companies that are Irish investors. Many Irish investors are involved in these companies. I know that laws can be changed but specifically in relation to export tax relief, and more specifically in relation to Shannon, while we have entered into no international obligations, nor can we, which would oblige Parliament to very the laws, we have undoubtedly in a widespread fashion built up our international reputation on the basis that we will not change these laws to the disadvantage of the people who understood them as being what their advisers told them when they came in.
This is of absolute importance in relation to the whole question of export tax relief and in relation to the Shannon Free Airport area. Even if it were only a penny in the £, it will be a significant matter of principle. But it will be more than that in relation to export sales relief. We have the duty of advising companies who are considering whether to do things here or not on the nature of the obligation which the IDA are authorised to give these companies, always related to an understanding that at some stage European policy will require us to repeal our export sales relief but never contemplating a situation in which we would of our own initiative in any way reduce that relief.
The matter is of the very greatest importance. There is another section which, if there is a sense of injustice removed, must be amended. I do not ask that amendments be made in relation to all of these. All I ask in relation to this section, connected with section 178 and the whole question of the surcharge, is that it would very quickly be put right and I do not mind how much administrative time is involved in that.
I wandered with Senator FitzGerald down the side alleys which he took us because I think, with all due respect, it has not much reference to this section which deals with fixed rate distributions. The surcharge provision in later sections would not apply to export sales relief which arises in relation to the trading activities of a trading company. The surcharge does not apply to the trading profits of a trading company, so there is that division between the two. I do not disagree with much of what he argued in relation to various incentives. It is the Government's intention that existing incentives be preserved intact where such incentives were given. It is intended to honour them. They have been acted upon and it is clearly a moral obligation to ensure that they are fully respected. The Government are not proposing in any way to interfere with any of the concessions which were made available to encourage people to engage in manufacture of goods here for export. Section 65 in no way tampers with any of the rights to which such people are entitled by virtue of exemptions given in the law relating to export sales relief.
We are simply providing in section 65 a means whereby the tax credit situation can be adjusted. Under the old system the dividend was paid gross. Under the new system the company will have its obligation to pay the dividend discharged, if it pays the preference dividend which with the tax credit will equal the old gross rate. If the tax credit is reduced because of export sales relief, the company will be required to make up the shortfall by a supplementary distribution.
Question put and agreed to.
Section 66 to 68, inclusive, agreed to.
SECTION 69.
Question proposed: "That section 69 stand part of the Bill."
This section reproduces section 373 of the Income Tax Act, 1967, with a change in the definition of a company to adapt it to the definition contained in section 1 of this Bill.
This reproduces in its entirety the existing provisions?
The language is slightly different, otherwise it is intended to be the same.
Question put and agreed to.
SECTION 70.
Question proposed: "That section 70 stand part of the Bill."
This section is intended to reproduce the effect of section 374 of the Income Tax Act, 1967.
Did the Minister give consideration to expanding that in any way?
Not in relation to this particular section. We made some adjustments later on.
Question put and agreed to.
SECTION 71.
Question proposed: "That section 71 stand part of the Bill."
This section reproduces section 375 of the Income Tax Act, 1967, with two changes. "Income" is substituted for "profits or gains", in both places where the latter expression occurs in section 375, because profits as defined in section 1 of the Bill includes capital gains which have not been brought within the Shannon relief. The section is the main provision giving exemption from tax in respect of profits from exempted trading operations.
Apropos this section, the capital gains tax should be renegotiated because these capital gains will very often be subject to further charge for capital gains in the countries where these distributions are being received.
This is important. The Minister would be surprised at the concern of advisers. Everything has to be set down or they will not believe it.
The charges arise purely out of capital gains tax?
It caused some trouble at the Committee.
In the meantime, so far as lies in our power, we will give the reliefs, even in the absence of double taxation agreements.
Question put and agreed to.
SECTION 72.
Question proposed: "That section 72 stand part of the Bill."
We reproduced section 376 with two changes. The word "income" is in section 72 substituted again for "profits and gains". The changes are similar in purpose to the previous one.
Has the definition of "control" changed?
Question put and agreed to.
SECTION 73.
Question proposed: "That section 73 stand part of the Bill."
This section reproduces section 377 of the Income Tax Act, 1967, with one change. The words "or gains" in paragraph (a) of section 377 are omitted as "profits" as defined in section 1 comprise "income and gains".
Question put and agreed to.
SECTION 74.
Question proposed: "That section 74 stand part of the Bill."
This reproduces section 378 of the Income Tax Act, 1967.
Question put and agreed to.
SECTION 75.
Question proposed: "That section 75 stand part of the Bill."
This section is the counterpart of section 379 of the Income Tax Act, 1967. The references in that section to "deductions" and "annual allowances" have been changed to "allowances" and "writing-down allowances" respectively in conformity with the changes in nomenclature effected in relation to capital allowances by the First Schedule.
Should we look at the First Schedule?
We can have a substantial debate either on the section which brings in the Schedule or on the Schedule itself. It is a matter for the House to decide where it wants this substantial debate to take place.
A substantial debate on the whole Schedule would drive us all out of our heads. Could we be told where in the First Schedule it occurs?
We can look at the protion that is relevant to the section, so long as it is not debated for the second time.
Could we have provisional agreement on section 75, with liberty to re-enter it?
We could take it up on Report Stage.
At page 164 of the Bill, First Schedule, paragraph 1 (6) where the reference is partly to years of assessment before the year 1976-77 "writing-down allowance" includes an "annual allowance", and an "allowance on account of wear and tear" of machinery or plant includes a "deduction on account of wear and tear" of machinery or plant. We are adopting the same nomenclature here. There is no change in substance here. It is simply a change in nomenclature. "Deductions" in the old Acts have become allowances now and "annual allowance" have become "writing-down allowance".
Is this a transitional provision? Is it not because the reference is partly to the years of assessment, 1976-77, that writing-down allowance includes an annual allowance and so on?
It would have been an annual allowance in the earlier years as so described, but in order to make clear what the wording of this Act means in relation to those earlier periods, we have to explain this in the Schedule.
They are treated as annual allowances, even though under the Act for that year they are otherwise described.
Question put and agreed to.
SECTION 76.
Question proposed: "That section 76 stand part of the Bill."
This corresponds to section 380 of the Income Tax Act, 1967, with a number of necessary changes. Briefly, it provides that distribution made partly out of "exempt" income and partly out of "liable" profits is to be treated as two separate distributions. The distribution made out of exempt income is in the hands of a company, to be treated as income from exempted trading operations, and in the hands of a person other than a company, to be disregarded for income tax purposes. A distribution made out of exempt income is not to carry a tax credit.
What on earth does that mean? I know it has enormous significance but——
I think it follows. The Senator might wonder why it is even necessary to write it into the Act, but obviously if the income itself is exempted it would not be appropriate that it should carry a tax credit.
I hope the other Assembly to which we are never allowed to refer have been studying the examples that the Minister has made available. A company's income for the accounting year, profits from exempt trading, is £60,000. It gets rent of £40,000. It pays corporation tax of £20,000 and it has a distributable income of £80,000. The company pays a dividend of £40,000. This dividend is divided into two separate dividends, that is to say, it is paid out of exempt income to the extent of the proportion that the exempt income bears to the total of all the income, and the other part is taken care of in the same way. The £30,000 will not carry a tax credit, will not be regarded as income for any purpose of the income tax code. In the hands of the corporate shareholder the amount of £30,000 would be deemed to be income from exempt trading operations, so that the exemption enjoyed by the company from which the dividend came passes on to the company which rules the shares.
In so far, however, as it arises from buying properties around Senator Russell's abode—it stretches more or less all over the south of Ireland— it is taxable to that proportion. That is fair enough, because that is the experience of the company in question, is it not? In regard to the fixed rate of dividend paid out of exempted Shannon income, what is the point here? I think your note here arises under section 65 (2).
Subsection (3) deals with the fixed rate of dividend as did section 65 in the case of exports relieved dividends. That is the section where you had a very interesting contribution to make on surcharge and on unrelated matters.
I was invited to make it.
This in no way affects the preference shareholder to his disadvantage. It is a fixed rate of dividend. I know the Revenue are hungry to get after these fellows so I must treat with the greatest suspicion any section which affects the recipient at a fixed preference dividend in Shannon or in export tax relief. I take it the Minister will tell us and that I do not have to look at it.
Annual payments and all that.
I cannot see the relevance of the fears that Senator FitzGerald has of these particular sections, section 76 in particular. Section 76 is not effecting any change. It is very properly apportioning the profits in the manner in which they have been earned, partly in relation to an exempted activity and in part to a non-exempt activity, and adjusting that for the purposes of corporation tax.
Forgive me for wasting time, but it is to ensure that effectively the investor gets as much as he would have got under the existing Act.
No more, I have no doubt.
Question put and agreed to.
SECTION 77.
Question proposed: "That section 77 stand part of the Bill."
This section was inserted in substitution for the original draft when the matter was before the other House. Under existing law charges on income, for instance royalties or annuities, payable out of profits or gains of a trade and consisting partly of exempted trading operations carried on at Shannon and partly of other trading operations are under section 381 of the Income Tax Act, 1967, apportioned rateably over the two categories of profits. The wording indeed is broadly similar to existing legislation and has exactly the same effect.
Question put and agreed to.
SECTION 78.
Question proposed: "That section 78 stand part of the Bill."
This section reproduces, with suitable adaptations, section 36 of the Finance Act, 1968, which is applicable to both export sales relief and Shannon relief. It provides for the giving of whichever of these reliefs is appropriate in respect of profits from sales between associated companies operating in the State which, apart from such sales, do not sell goods on the home market.
"Suitable adaptations" means in language?
Not in legal effect as adapted for the purposes of this Act.
Question put and agreed to.
SECTION 79.
Question proposed: "That section 79 stand part of the Bill."
This maintains the status quo in relation to bodies like the Agricultural Credit Corporation, CIE, and so on.
Question put and agreed to.
SECTION 80.
Question proposed: "That section 80 stand part of the Bill."
This maintains the present provisions in relation to the Voluntary Health Insurance Board.
I am sure there are officials in the Minister's Department who are constantly examining the accounts of that board. It is providing a terrific service for those who avail of it. There is a case for exempting them. I do not know whether there is any material income to be earned from deposits, but there is a case for treating them as a voluntary body; it is wholly owned by the State.
I will take note of what the Senator says. I am not certain what the position is.
Question put and agreed to.
SECTION 81.
Question proposed: "That section 81 stand part of the Bill."
Section 81 is a transitional provision. It deals with distributions out of profits accumulated prior to April, 1974. It reproduces section 387 of the Income Tax Act, 1967, suitably adapted for corporation tax purposes, and takes account of the changes introduced by the Finance (Taxation of Profits of Certain Mines) Act, 1974. The tax reliefs in respect of certain mining profits terminated on April 5, 1974, and the section is concerned with distributions made out of tax-relieved income which arose before that date. It provides that such distributions will not rank as income in the hands of the recipients who will not be entitled to a tax credit in respect of such a distribution. Where the recipient is another company, the distribution is to be treated as if it were exempted income, with the same consequences as if the recipient company had themselves been granted mining relief in respect of the income represented by the distribution.
It maintains entirely for the particular mining companies concerned the adversity introduced into their lives by the Finance (Miscellaneous) Provisions Act, 1974, but no additional adversity?
I do not know if I would choose the word "adversity", but the section preserves whatever benefits they enjoyed prior to the modifications of 1974.
It does make it specific that profits earned prior to 6th April, 1974, do not bear tax?
Question put and agreed to.
SECTION 82.
Question proposed: "That section 82 stand part of the Bill."
This provides for the giving of a reduced tax credit in respect of distributions made after 5th April, 1976, out of profits derived from the mining of coal, gypsum and anhydrite which were relieved from tax for the years up to and including 1968-69 under the Finance (Miscellaneous Provisions) Act, 1956.
Why were these particular minerals specified?
I am not certain as to the reasons why the concessions were introduced originally, but obviously it was to stimulate mining in these particular minerals. The concession was withdrawn some years ago.
Yes, they have been withdrawn since 1968-69.
There is a provision somewhere in the Bill to provide some such relief from taxation. I had in mind an effort that is being made to revive the mining of phosphates in County Clare and I thought a provision of this nature might be helpful.
Everyone in the House should remember that the great year for fiscal incentives was a year as bad as this year—1956. Fiscal incentives were introduced in the Miscellaneous Provisions Act, 1956, and the Minister should not turn his eyes away from the thought of suitable further incentives in this year.
If we look back to the original section, it states, "by exports that were new or were of the previous year". That ought to be the trick again.
I would have to jump to Brussels and take account of their bureaucracy as well as our own.
In regard to export profits the Minister may be right but not in regard to internal incentives. There is no need to jump any Brussels hurdle for that.
The effort starts, but the cost to the Exchequer is only borne many years later.
Would the Minister keep in mind the encouragement of phosphate mining which is a very low-grade mineral?
I will certainly look at it.
Question put and agreed to.
SECTION 83.
Question proposed: "That section 83 stand part of the Bill."
This section is not making any change in substance but it is providing new machinery. It lays down the manner in which income tax is to be charged on receipts in respect of dividends and other distributions made by Irish resident companies. They will be charged under a new Schedule, known as Schedule F, on the aggregate of the distribution and the tax credit. The new Schedule is necessary because of this arrangement of the distribution and the tax credit attributable to it. A non-resident, however, will be charged on the actual distribution only at the excess of any higher rate of tax for which he may be liable over the standard rate and would have to account to the Revenue for income tax on any annual payments made out of the distribution.
I raised this matter of the taxability of a dividend earlier. The power to tax a dividend only arose quite recently.
The Minister has given an illustration in subsection (4). It seems to mean that the distribution received by a foreign resident might, under this Schedule, be liable to a higher rate of tax, under subsection (4). I am in favour of collecting money from everybody for the health of the unfortunate country, but I should like to know on what basis the non-resident invested and so on; did he think that he would be treated on one basis and now finds himself treated on another? I am speaking as a notorious conservative.
We are not effecting any change compared with the existing law. We are simply adapting the existing provisions, because we must use new machinery to arrive at the same result.
I am looking for practical illustrations from the Minister which, indeed, every other Senator is entitled to get. I am misled by the fact that two sets of figures are given to illustrate subsection (2) and subsection (4). I take it that if we were to give an illustration of subsection (4) based on existing law, it would produce an equivalent amount of tax payment. I understood that the amount of tax would be additional. I would like to know the policy that is involved in this. I presume it does not apply to Government.
I am not quite certain what the Senator is worried about. I am sure the Senator accepts that we have to have different machinery. We are not dealing with the tax deducted any longer; we are dealing with a distribution and a tax credit. All that this section is doing is producing a result which is similar to the previous one and there is no additional tax.
Question put and agreed to.
SECTION 84.
Question proposed: "That section 84 stand part of the Bill."
This section, together with section 85 and also sections 96 and 97, relating to additional matters to be treated as distributions in relation to close companies, defines "distributions" for the purpose of corporation tax. Briefly, a distribution will comprise any dividend, including a capital dividend, any distribution in respect of shares, except a bona fide repayment of capital or a distribution in respect of share capital on a winding up, the redemption of bonus securities, certain interest which is in the nature of a distribution——
Redemption of bonus securities irrespective of their length? I do not want to interrupt the Minister.
Dealing with the redemption of bonus securities, certain interest which is in the nature of a distribution, the value of assets or liabilities of a company transferred to its members in so far as it exceeds any consideration given for the transfer and, in the case of a close company, certain payment to participators or directors which are distributions by virtue of sections 96 or 97.
Would it help the House if we could treat the distributions of companies which are not close? Could we know of ones that are distributions for companies that are not close? Does section 84 deal with distributions whether the companies are——
——public in the fuller sense, not close. Would the Chair agree if we treat all distributions that are relative to all companies, whether close or not, in one group?
Section 84 deals with all companies.
Are there no other sections which deal with all companies?
It is dealing with all companies.
The section deals with all companies including close companies.
Section 83 which introduces this precedes the company distributions. We now go on to deal with what are to be treated as distributions for all companies whether close or not.
Yes. All Part IX, sections 83 to 93, deals with distributions.
But some of those sections deal only with close companies.
There are special additional distributions for close companies.
The next part is where it is going to become difficult. Could we take the section which is described as "Matters to be treated as distributions" which deals with every company that exists in Ireland? It does not deal with companies that do not reside in Ireland. We will deal with section 84 and leave out 96 and 97 for the moment. Am I correct in understanding that the first effect of something being a distribution is that it is not an allowable deduction for the purposes of corporation tax?
Under this section for all companies, any dividend paid by a company, including capital dividend, is not an allowable deduction. That is fair enough for the first part of that. For the second part, it includes a capital dividend, for which we have no definition, but which all the dictionaries would seem to suggest means only dividends got out of a capital gain, wherever made.
The capital gains tax Act specifically provided that a capital gains tax be levied on gains made before a date which is specified in that Act, and companies carried on and made gains long before the date given in that Act. Some of them kept these gains in their companies and did not distribute them as they could have done. For whatever purpose they used them they kept them. I cannot see how this is not retrospectively taxing at a higher rate than capital gains tax does, capital gain made before the introduction of capital gains tax. I cannot see how it is not doing that except where a shareholder's general income was below his allowances and so on. In a lot of cases a standard rate of tax will apply.
The people who have been managing these companies have been managing them knowing perfectly well that there was some capital dividend available for distribution which could be received free of tax at some stage, which they could have given out free of tax prior to the date.
The retrospective element in this is unjust. Perhaps the Minister will tell the House that there is something else they can do with capital dividends—buy Exchequer bills, invest in the national loan or put them further into trading operations. While they had capital dividends that they could have declared why did they not declare them? There could be all sorts of reasons why. They could have got them out tax free anyhow. What is the logic behind that?
Is it the fact that capital dividend accruing prior to April, 1974, and not paid out since then, that capital dividend which accrued prior to the passage of the Capital Gains Tax Bill—in that legislation there was a specific prohibition vis-á-vis tax on any capital gain prior to April, 1974—capital gain distributed in the form of dividend not declared prior to April, 1974, is now being made subject to tax? If that is the case, it is flying in the face of this specific guarantee given in regard to the retrospective aspect in the course of the passage of the Capital Gains Bill through both Houses and would appear to fly in the face of the actual specific section which debarred retrospective tax in respect of capital gains written into the Capital Gains Tax legislation. It is a very net point and I would like clarification from the Minister.
It seems quite clear to me that section 84 in conjunction with Schedule V makes it quite clear that capital profits earned prior to 5th April, 1976, now become taxable, if paid subsequent to the 5th April, 1974. Furthermore, the capital profits made subsequent to that date incur a tax rate of 35 per cent instead of 26 per cent.
35 instead of 26 per cent.
The House should remember that we are dealing with actual distributions. We are not dealing with a gain by the company as such. That is dealt with under other legislation. We are dealing with distributions by the company of capital dividends. The treatment which we are according to them under section 84 is in line with well-established precedents in countries which have both income tax and corporation tax.
The reason why such distributions of capital dividends were not previously taxed here was that we did not have a capital gains tax until comparatively recently. It is interesting to note that in the neighbouring island, in Britain, the treatment which we are according now to distribution of capital dividends was introduced as far back as 1965. Of course, they had capital gains tax as well as their corporation tax at that time. Now, on the first available opportunity, we are amending the corporation tax laws and have for the first time a capital gains tax and it is obviously appropriate that we would introduce provisions which are similar to those which are in operation in other countries. There is a very good reason for doing so. In principle there is no distinction in dividend arising out of a trading profit and one arising out of a capital gain. In both cases, as far as the shareholder is concerned, they are a reward to him for his investment of money in the company. There is no intrinsic difference in the benefit which he obtains. It is a reward for his investment, for his share-holding. It is appropriate that he should pay tax at a similar level on both distributions.
This matter was dealt with in 1955 in a United Kingdom Royal Commission on the taxation of profits and income. This commission report pointed out that it seemed to be the prevailing theory that a limited company could pay a special kind of dividend to its shareholders which was exempt from being included in the income of the recipients, either for the purpose of income tax or for the purpose of surtax. The condition of the exemption appeared to be the company had made capital profits which were not chargeable to tax in its hands. It was then assumed that these profits could, still preserving the title of capital profits which they bore as profits of the company, be passed on to shareholders in the form of dividends. While not questioning that a company might make a profit which, in arising from the receipts of its trading operations, was not a part of its taxable income, they nevertheless, regarded this theory as to dividends with misgivings and some surprise. They concluded that these special capital profits dividends must be regarded as cash dividends which the company concerned was in a position to distribute after making a general review of the current value of its assets and satisfying itself that they would be sufficient to meet the various claims upon them, including the claims of the share capital account. From this point of view these dividends did not appear to differ substantially from other dividends.
The commission's view was that there was not sufficient ground for treating these capital profits dividends as if their nature was different from that of other dividends. All represented benefits accruing from time to time upon the shares which were the source of the dividends. All arose while the company was a going concern. None involved any reduction of the capital paid up on its shares. The Royal Commission recommended accordingly that they should, by an amendment of the law, be regarded as taxable income. In the United Kingdom they had both corporation tax amending legislation and capital gains tax, as we are now doing, providing the logical manner of treating such dividends.
I am in favour of removing all anomalies in our tax system. I am in favour of anybody being allowed to contrive a situation, by artificial means or otherwise, to his advantage over his colleague, contemporary or fellow-resident. All sorts of border-line questions arise about whether it is wise for the Government to seek the full type of equality of treatment. All sorts of questions arise with regard to wealth tax and its usefulness for us at this stage of our development. I have no doubt whatever that the Royal Commission was right when it said that they should receive like treatment. I have no objection to somebody receiving a capital dividend in the future in respect of profits arising from gains made after the enactment of the capital gains tax legislation being treated in the same way as somebody who is getting profits, dividends based on his trading activities, or whose taxable income is Schedule E.
I do not like the anomalies that are in Schedule E. Some of these are badly in need of change. I recognise the Minister's difficulty with regard to meeting all these problems. Justice is what we aim at but cannot hope repidly to reach. There is extreme difficulty, first of all, in becoming fully aware of the nature of the injustice, and, secondly, in conceiving the method of alleviating it. We are enacting a provision which means that any poor old dud of a company that had £100,000 stuffed away in its stocking could have shoved it out before whatever date in 1974 and got it tax free and did not because it did not have some chap with a crystal ball saying, "Ach, do not mind that thing about 5th April, 1974, you had better get it out quick because if you do not you will find that your capital dividend in the future is going to be taxed and not at 26 per cent, at a higher rate than 26 per cent according to the rate of taxation applicable at present".
I regard that as unjust. I do not mind what the Royal Commission reported. I do not know what the British Government proposed for enactment or whether they made any distinction. In any case I would not know which government was in power at that time.
Surely you can judge on the merits.
I would like to see the provision——
——including a capital dividend made in respect of gains or profits realised after 5th April, 1974. Apportionment of rules if necessary. Do we now have something like that in some other section where we have distributions made out of capital profits? Do we not have already, in relation to the future, provision which distinguishes whether the money is coming out of capital gains or profitable income? You would think I spend my life receiving dividends. Indeed, I do not. If I did I would not be so concerned about some sections of this Bill as I am. The Minister knows a great deal more than I do, that out of somebody's transfer of capital, somebody's abstinence is necessary for the generation of employment. There can be a great debate going on for a long time as to whether we are going to adopt a system here of shoving everybody's standard of living down by appealing to their nationalistic fervour to accept it voluntarily, getting them lined up in tribes like the Japansese do and singing songs to them to reduce savings to cultivate the future. Bring the money in and pay the people for giving it to us, a share of the profit they generate. It is only out of these kinds of sources that we are going to get it, that is why I am concerned about it. It does not matter to me, there is no company that I am connected with which can in any way give a capital dividend.
It is very important that there be no retrospective element in our tax laws. I accept the Minister's taking, as he has done in the various Bills, the publication dates. There was the gift tax problem when everybody went around in circles making gifts the day after they heard they were going to be taxed. He did not fix that as the date and the retrospective element is 27th November, the date of publication of this Bill. Subject to that, retrospection is very dangerous.
I will confine myself to retrospection. It is fundamental to the whole financial and investment structure that whatever taxes we impose and they have to be imposed, are seen to be done with integrity. That basically means an absence of a retrospective element, because if there is one thing above everything else that gets you into the banana republic league it is this element of retrospection or any suspicion of such that arises.
This measure appears specifically to contain a retrospective element. Like Senator FitzGerald I am not holding any brief for any company in which these circumstances arise. I ask the Minister if, in the situation of a capital gain made prior to 5th April, 1974, incorporated in a dividend not declared before April, 1974, now being declared and distributed—I am relating here to profits made prior to 5th April, 1974—this now qualifies for the 35 per cent tax that it appears to qualify for under this legislation? Is that not in direct conflict with assurances given in regard to capital gains that they would not arise in respect of any profit prior to 5th April, 1974, not alone guarantees given but guarantees written into the Capital Gains Tax Act, 1974?
Senators are overlooking the fact that we are not taxing the gains made by the company prior to the date of operation of the capital gains tax. There is no question of retrospection. The gain has been made by the company before the date of operation of capital gains tax.
You are taxing the dividend, taxing the distribution.
Taxing the distribution made subsequent to the introduction of the corporation tax code. That is not retrospection. If the distribution does not take place no occasion to tax arises. If the distribution takes place afterwards then the occasion to tax arises. I am sure that is why the British Government acted in 1965. If my memory serves me correctly that was a British Tory Government. I am corrected—my political informants tell me it was a Socialist Government. I do not know whether that puts Senator FitzGerald on the horns of a dilemma or not. I am glad he has accepted my exaltation to debate it on its merits. If he considers the merits he will see that we are not having any element of retrospection because the company is not being taxed on gains made prior to the operation of capital gains tax.
An occasion of tax arises on a distribution made subsequently. We say, and Senator FitzGerald accepts in principle, that there is no fundamental distinction between a dividend which arises out of trading profits or which arises out of a capital adjustment. If that be so then I would say we are doing the right thing here and we are strengthened by the precedent and confidence of other countries.
The Minister is into semantics now.
I think the Minister would agree when I say he is doing the right thing in regard to capital profits made subsequent to 6th April, 1974, but surely he is not quite right in saying that even though the capital profits are distributed post April, 1974, they were earned or accumulated prior to that date. It is the date of distribution that, in the Minister's mind, decides the rate of taxation. We say there is retrospection in that the actual profits were accumulated prior to April, 1974. There is no retrospective element, obviously, as regard the distribution of the capital profit but the earning of the capital profit does, to my simple mind anyway, involve retrospective legislation, because it was earned prior to April, 1974.
Would the Minister consider this because the introduction of a retrospective element is there? It is only semantics to draw a distinction between distributed gains post April, 1974 and gains that were accumulated pre-April, 1974. The capital gain secured or obtained or made prior to April, 1974 is being taxed here. It is being taxed in the form, I agree, of a declared and distributed dividend which arose after April, 1974 but it is only semantics to draw a distinction. It is a capital gain made prior to April, 1974, that is now redistributed in the form of distributed dividends.
It is the same thing. It is a capital gain made prior to April, 1974, that is now re-distributed in the form of a declared dividend. It is a rose by another name and the Minister is well aware of that. There appears to be a lacuna, an omission, and it is important to preserve the retrospective integrity aspect which we have always maintained in our finance legislation and particularly so in this case where we gave very specific guarantees and the Minister rightly did so in introducing capital gains tax. I am in favour of capital gains taxation but as I said on that subject guarantees were given that there would be no retrospective element in it. Everybody had ample notice prior to the enactment of that legislation that capital gains would operate from 5th April, 1974. I can imagine a number of cases where such a gain would now be incorporated in a distributed dividend. After all, it is only two years ago. It is quite on the cards that for a number of reasons the gain would have been retained by the company and would only now be declared and distributed in the form of dividend. If the Minister can see his way to devising some drafting method of enclosing that, it is important from the point of view of the generally high regard in which we are held in regard to our finance legislation.
If a company had made a capital gains profit prior to April, 1974, and had held on to that and continued to hold on to it, no difficulty arises. That is agreed by all sides. The only occasion the question arises is when the distribution is made and the distribution is something which followed the introduction of the tax and, therefore, the parties know that if the distribution takes place subsequent to the introduction of the tax it will be liable to payment of tax. There is no element of retrospection there. A company can withhold the capital profit and use it some way other than by distributing it. If it distributes it, then this Bill very properly provides that the distribution will give an occasion to payment of tax.
It is interesting that a capital dividend paid by a non-resident company has always given rise to payment of tax, so we are not introducing here a concept which is strange to the law.
You are changing the law utterly.
We are providing that subsequent to the introduction of the corporation tax if a distribution takes place that the distribution out of capital profits by an Irish resident company will be dealt with as income in the hands of the recipient in the same way as such a distribution is handled when it is a capital distribution of a non-resident company. Yes, that is a change but it is a change after the event. There is no element of retrospection.
Would the Minister be prepared to look forward now that the Seanad——
I am prepared to go back and forward all the time but I prefer to look forward, quite frankly.
Let us look forward to the consequences we are pursuing in adhering to this particular paragraph. All companies are not in a position to retain and apply this capital. I think the normal trick would be to say: "We cannot use this in that way and we will forego the advantage for our shareholders." But there may be other cases where the old man has been waiting for his capital dividend when he retires. I do not know of any cases myself.
I can think of quite a few.
I am getting no such dividends myself and it is not as if I knew there was any capital dividend due to me. Everybody will be satisfied to apply the section to his own circumstances.
I will certainly think about it. I realise that if I think about it long enough it will become irrelevant anyway.
I gather that the general principle of all of this is to capture as a distribution anything that is disguised, for the purpose of taxing it.
Much of this is clearly right but I wonder where there is provision regarding redemption of bonus securities. The normal old trick of issuing the bonus securities is caught and properly caught. Has anyone caught on to the situation where the bonus securities might be taken in satisfaction of a right to the capital which could have been a bonus issue which is excluded but they are prepared to take the bonus securities over a term of years and provide permanent capital redeemed of the option of the company? I am sorry to put this question: these are rather commercial matters, but is there any possibility of this hindering the financing of companies? It seems that there is no consideration for bonus issues. I do not want to fascinate the House with a long discussion of what is involved in the bonus issue but, in fact, when somebody gets a bonus issue he is giving up his rights to draw out the accumulated reserves and they are pushed up in paying for the shares that are issued. I understand that bonus issues are not regarded as taxable.
No, they are not unless redeemable.
I take that point but I just wondered with the highly complex financial technology developing, whether for taxation reasons we have left the door open enough to make use of other types of bonus issues which could have a security element. This, again, is something which could be amended in future paragraphs, if there is anything in it. There are certain kinds of bodies who want to get a fixed interest on their money and they say: "We will leave it in and do without the distribution to which we are entitled and it will suit us best if we get it when we are aged 70." I do not know if there is anything in that point but I should like the Minister, in general, to consider it. He has indicated that he is prepared to do that. What is the position as regards subsection (2) (d)—interest or other distribution out of assets of the company? What does that mean?
I can assure the House that I would not be in favour of being so restrictive in tax legislation as to discourage desirable commercial practices and suitable arrangements. We, obviously, have to be very clear as to what distributions are that could avoid the charge to tax by making arrangements specifically designed to avoid a tax charge. No doubt we will have the ingenuity of people applied to the new arrangements and I would be very disappointed indeed if any of the measures in this Bill kill any desirable arrangements required in the legitimate interests of investors.
On paragraph (2) (d)—it might solve many problems if I read my note. It may help the Senator. It deals with any interest paid on or after 6th April, 1976 or other distribution out of assets of the company in respect of the securities to which we have been referring. This paragraph is designed to prevent the withdrawal of profits from companies in the guise of interest. The effect of treating interest and the like under this paragraph as a distribution is to preclude its allowance as a deduction in computing the profits on which the company is to be charged to corporation tax, so that it would not be an allowable expense any longer. It would be a taxable receipt on distribution, which it is anyhow. So it is really directed at preventing an artificial reduction of the company's tax liability. But no amount should be regarded as representing the principal secured by a security in so far as it exceeds any new consideration which has been received where the security issued before 27th November, 1975, which is the date of the circulation of the Bill. It is accepted in subparagraph (ii) of subsection (d) that the position is as quoted in regard to securities, where they are convertible into shares, or which are issued on terms which are reasonably comparable with the terms of issue of securities so quoted.
Who determines that? Can you ever get anything comparable on the stock exchange? You will take a lower rate of interest from a quoted security than you will look for from any company I have had anything to do with. How can you compare like with like because they are not alike?
If all parties were reasonable it would be possible to reach agreement but if they are not, then the Revenue Commissioners will express their view and any person dissatisfied therewith will have recourse to the normal rights of appeal. I can understand Senator FitzGerald's fears that it could lead to innumerable delays such as have occurred from time to time in the operation of estate duty. This is inseparable from the complexity of company law and shareholdings, their value, control and so forth.
What other yardstick could be used apart from what is here?
What is all this about securities provided by the company and held by a company not registered in the State? I can understand excess interest but that does not arise here. It says that a company will be regarded as issuing securities issued by the company and held by a company not registered in the State in certain circumstances, but not in all circumstances. The circumstances are that the company which issues the securities is a 75 per cent subsidiary. What is a 75 per cent subsidiary? I take it the idea here is to prevent the foreign company from depleting the profits of the company for corporation tax by issuing securities to its parent and taking the reward in the guise of interest rather than a distribution.
Interest on loans, if I can use that term in order not to confuse the issue. The purpose of the provision is to prevent the non-resident company from financing the Irish subsidiary by way of loan capital as extracting in the guise of interest, which is tax deductible, funds which in reality are distributions and not tax deductible. A deduction for interest accords relief to the paying company at the full corporation tax rate of 50 per cent whereas if there is a full distribution of the profit the tax payable by the company, which it cannot impute to the shareholders is 23 per cent. For example, let us assume a profit before interest of £100. Less interest payable of £100 would leave a nil situation—no tax payable by the company. Let us again assume a profit of £100, with tax at £50, which would give a distribution of £50 plus tax credit of £27, which would be seven-thirteenths of £50, or £77. Tax ultimately suffered by the company would be £50 minus £27, that is, £23 or 23 per cent.
The provision in section 84, subsection (2) (d) (iv) is to prevent the loss of revenue which would arise if there were no restriction on the allowance of interest to a non-resident company which controls the Irish company and which in respect of the interest is outside the ambit of the corporation tax. It should be noted that for purposes of corporation profits tax, which is not imputable to the shareholder or on distribution, interest paid to a person in control of the company is not deductible.
Another consideration is that if the country of residence of the parent is one with which there are double taxation arrangements on the OECD model then credit would normally be given against the tax of the parent for the full Irish tax underlying the distribution.
This is related to a limit of £2,000, discussed on an earlier section?
There is no £2,000 limit here one way or the other. What we are ensuring here is that an artificial arrangement is not set up so that people receive in the guise of interest what is, in fact, a dividend on investment.
There will be a fair amount of extra capital duty if it is spread more evenly. Is there any fear that any of this will hit anybody else?
This is parallel to the position which exists in the OECD countries?
We have no prospective investors outside the OECD?
I could not answer that but I suspect that having regard to the fact that OECD represent 26 of the wealthiest countries in the world that our prospects of getting anything from outside those countries are very slim.
Question put and agreed to.
SECTION 85.
Question proposed: "That section 85 stand part of the Bill."
This section is designed to prevent tax avoidance where a company repays share capital after the 27th November, 1975 which, of course, is the date of the circulation of the Bill and at or after the time of that repayment the share capital repaid is replaced by a bonus issue. The section achieves this by providing that the amount of the bonus issue up to the amount of the share capital repaid is to be regarded as a distribution. In the case of a non-close company a bonus issue of share capital which is not redeemable and which is made more than ten years after the capital repayment is not to be treated as a distribution.
Where do the ten years come in?
Question put and agreed to.
SECTION 86.
Question proposed: "That section 86 stand part of the Bill."
This section deals with the converse of the situation dealth with in section 85 where there is first a bonus issue and a later repayment of share capital. It achieves in relation to the repayment or redemption of a bonus issue of share capital what is achieved by section 84 in relation to redemption of a bonus security. I have furnished examples for the operation of this.
Question put and agreed to.
SECTION 87.
Question proposed: "That section 87 stand part of the Bill."
This is a definition section and I think it is self-explanatory.
May we have the explanation?
We set out in subsection (1) rules for determining what is new consideration, a term to which there are several references in section 83 in particular and subsequent sections. Subsection (1) defines "new consideration" as consideration not provided directly or indirectly out of the assets of a company. The capitalisation of profits is not "new consideration". There is a proviso that share capital paid up out of share premium account, itself representing new consideration, is to be treated as issued for new consideration unless the premium has previously been taken into account in deciding that a return on shares represented a repayment of share capital and not a distribution. Subsection (2) (a) excludes from the definition of new consideration any consideration derived from the value of any share capital or security of a company or from voting or other rights in a company unless it consists of money received or the giving up of a right as described in subparagraphs (1), (2) and (3) which I do think are self-explanatory. I will be happy to go through the remainder of the section, subsection by subsection, if desired.
Question put and agreed to.
SECTION 88.
Question proposed: "That section 88 stand part of the Bill."
This section provides for the tax credit to be given to recipients of dividends and other distributions by an Irish resident company. The value of the tax credit will be equivalent to the income tax which hitherto had been deductible from a gross dividend.
Question put and agreed to.
SECTION 89.
Question proposed: "That section 89 stand part of the Bill."
This section deals with the case where the profits of the company are stripped by way of a distribution which is, or arises out of, an issue of bonus shares or the repayment of a security, and which is to be treated as a distribution by virtue of section 84 subsection (2) (c) or (d), section 85 or section 86 subsection (1). It applies to any recipient of such a distribution and provides that except in so far as the recipient receives a normal return on his investment no account is to be taken of such a bonus issue or relevant tax credit for the purpose of any exemption relief or set-off.
Does that mean that if any issue is made out of taxed profits a recipient under section 89 cannot recover tax if he is not liable to tax?
The section is designed to prevent the exploitation of the Exchequer in the issue of bonus shares or securities or the repayment of capital where the issue of the shares or securities or the repayment of capital is treated as a distribution. In the absence of section 89, the recipient of a distribution could claim payment of the tax credit in respect of a distribution if he were entitled to any exemption or relief, for example, for losses which would enable him to make such a claim and in this way, as it were to milk the Revenue. Section 89 subsection (5) says that the tax credit in respect of a distribution which represents a normal return on the recipient's investment will be available for payment in the normal way.
Does that mean that they can, in fact, get a recoupment of tax?
On the basis of a normal return on investment?
That begs the question of what is a normal return.
It will be related to the general pattern of that company's affairs.
Does it mean in effect, that anything above what is regarded as a normal return even though tax has been paid on it, is not recoupable by a recipient who is entitled to recoupment?
It would have to be considered by reference to what would have been a legitimate distribution. If it appeared that it was an artificial operation to avoid payment of legitimate tax, then a query would arise. There would be, of course, the right of appeal for any person aggrieved by the Revenue Commissioners' assessment.
Question put and agreed to.
SECTION 90.
Question proposed: "That section 90 stand part of the Bill."
The section provides that where a distribution is made after 5th April, 1976 out of capital profit, the company making the distribution will be assessed to income tax to recover from it tax equivalent to the tax credit in respect of that distribution, less the amount of any capital gains tax or equivalent corporation tax borne by the company in respect of it. Provision is also made for the case where a company makes a payment to a participator or his associate or pays interest to a director or his associate in such circumstances that the payment is a distribution by virtue of section 96 or 97. If such a distribution is greater than the profits of the company, the excess will be deemed to be made out of capital profit which has not been charged to capital gains tax or to corporation tax for the purpose of recovering from the company the equivalent of the full amount of the tax credit in respect of the distribution.
Question put and agreed to.
SECTION 91.
Question proposed: "That section 91 stand part of the Bill."
This is similar to section 90. It deals with the case where a company, after becoming resident here, distribute profits earned before residence here commenced and which, for that reason, did not suffer Irish tax. In such a case the company will be assessed to income tax under Case IV of Schedule D in an amount equal to the tax credit in respect of distribution.
Could you have a company, an Irish company managed and controlled in the UK, which change their residence which, being managed and trading in the UK, presumably paid UK corporation tax? Would that situation be taken care of under the double taxation laws?
Are we not trying to get people to invest in the country? If they are not here already, do we want to discourage them from coming by saying: "You made a £1 million last year so we will take £500,000 when you cross our threshold"? What great danger are we afraid of?
We are dealing here with a company which was formerly resident abroad and becomes resident here subsequent to the passing of this Act, say, on 31st March, 1977, at which date they might have undistributed profit of £100,000. Section 91 will operate in this way. If after the company become resident, on 1st April, 1977 they pay a dividend of £40,000 that dividend would carry a tax credit of £21,538, that is £40,000×35÷65. This is provided by the application of section 88. An assessment to cover this tax credit would be made on the company in the following manner. The assessment would be on £40,000 plus the tax credit, that is £61,538 at 35 per cent which would give a tax of £21,538. I would not consider that the operation of this section would in any way act as a disincentive to investors coming here. If the company did not wish to pay the tax in Ireland it could easily be arranged to discharge the tax somewhere else.
Or pay £50 which, I understand, is the new rate for registering a company.
Then, what would happen to undistributed profits in the original company is a matter for determination elsewhere. Clearly, if a company are resident in Ireland and make a distribution, they have to attach a tax creditor and we have to tax it. I do not think there is any way we can avoid that.
Question put and agreed to.
SECTION 92.
Question proposed: "That section 92 stand part of the Bill."
Section 92 is an anti-forestalling section. It provides that capital distributions, that is other than dividends paid out of the company's income, made between the date of the circulation of the Bill and 6th April, 1976, shall be deemed to have been made on 6th April, 1976.
Question put and agreed to.
SECTION 93.
Question proposed: "That section 93 stand part of the Bill."
This section continues the effects of section 20 of the Finance Act, 1969, taking into account the provisions of section 23 of the Finance Act, 1974. It provides that dividends and other distributions paid out of exempt farming profits arising before 6th April, 1974 or out of exempt profits of woodlands or from the sale of the services of a stallion will not carry a tax credit and in the hands of an individual will be disregarded for income tax purposes an will rank as exempt from it when received by a resident company.
There was something in the original Bill but it has gone.
Question put and agreed to.
SECTION 94.
Question proposed: "That section 94 stand part of the Bill."
This section is concerned with the definition of a "close company". Broadly speaking, a close company are under the control of five or fewer participators or of their participators who are directors however many such directors there may be. A non-resident company, an industrial and provident society, most building societies, a company controlled by the State and a company controlled by a non-close company, will not be regarded as close companies.
Is this a new definition of close companies?
There is a definition in section 530 of the Income Tax Act.
There is no fundamental change?
Is a participator necessarily a shareholder.
So there could be five non-shareholders?
Yes. They could be people who had control over the company, but they might not be shareholders themselves.
I gave the last energy left in me the other night to puzzle out what is meant by subsections (2) (a) and (b). I wonder what Senator Lenihan makes of this:
(2) (a) a company is to be treated as controlled by or on behalf of the State if, but only if, it is under the control of the State or of persons acting on behalf of the State, independently of any other person, and
(b) where a company is so controlled, it shall not be treated as being otherwise a close company——
That would be fine if it stopped there
——unless it can be treated as a close company as being under the control of persons acting independently of the State.
All I can say is, I congratulate the draftsman. I deeply desire his explanation as to what he is proposing to us to legislate. What conceivable meaning has he attached to this language? Are we thinking of a company which are not to be treated as a close company because they are under the control of the State, yet, in some mysterious fashion, although controlled by the State, because they are controlled by somebody other than the State. People have difficulty in accepting the mysteries of religion.
Why put it in at all? There are enough people engaged to define properly what the Minister thinks it prudent to provide.
I would hope there were. I am quite sure that there is some situation either in existence or brewing that is being contemplated by this paragraph. Are we to have a situation in which the State is to be controlling it and yet going to so control it as to keep it a close company so that it can apply the disadvantages of being a close company to its fellow participants in that company? Is that what they are after? If that is what they are after, at least we ought to know that that is what they are after. Those who have to go into the embrace of the bear ought to know the consequences of the hug. We know that all sorts of consequences follow from being a close company. There must be some situation which is in existence. After all there cannot be too many. I take it we get the reports on the State bodies, companies that Fóir Teoranta have an interest in.
Do we read their reports with avid interest and note the extraordinary success of the public sector in sponsoring enterprises everywhere? What sort of situation are we talking about? Are we talking about a case where Fóir Teoranta are, for example, taking a great block of equity and because they are taking a great block of equity it would, were it not for this section, be a close company? But it then does not want to give the benefits of not being a close company to the other shareholders of the company. Is that what it is? Would Fóir say: "Look, we are going to organise the share structure in such a way that you are going to be under the control of the created close company"?
I do not see what it adds. Does (6) add anything to what is in (a)?
I know nothing about it—unless they are trying to capture somebody with the provisions of a close company where the company is controlled by the State.
It is looking forward to any and every possibility, whatever about probabilities. Subsection (2) is designed to deal with a case where the State might, as of now, have a 51 per cent shareholding and a non-State interest has a 49 per cent interest but with a right to acquire a larger interest and put the State in a minority situation. It might, as of now, be deemed to be State controlled and therefore, not a close company, but in the event of the exercise by the minority non-State interest of its right to acquire shares, then the State would lose its control. In that case it could become a close company. That is the effect of subsection (2).
Question put and agreed to.
SECTION 95.
Question proposed: "That section 95 stand part of the Bill."
This section provides that a company will be regarded as not being a close company if shares carrying 35 per cent or more of the voting rights are held by the public and the shares have been dealt with on a stock exchange during the previous 12 months provided that not more than 85 per cent of the voting power is in the hands of the principal members—a principal member being a person who is one of the five persons holding the largest voting power and who himself holds more than 5 per cent of the voting power. I might mention that in the other House we changed the qualifying voting right from 50 to 35 per cent.
That was a good change but not big enough. What is the information as to what the stock exchange listing requires you to make available?
It used to be 25. Am I wrong in thinking that if there is an allotment to the public of 35 per cent of the shares, and somebody buys back some of them, would that make it a close company again? Very often, a company's shares have to be supported—I am not talking about somebody trying to do a quick one on a member because he knows something more about it—but where there is an unnatural fall in the share price taking place that he knows there ought not to be and he has to support them. There has been so much written into American practice that a company can, unlike our system, buy in the shares out of its own treasury. In that case would the company lose the disadvantages and assets to a close company? In regard to the 35 per cent, if a loss is unconditional is that the end of the matter?
Those shares are at that time held by the company, not by the public.
We could nearly spell out the number of public companies that are to be in these circumstances not close companies. Do we think this is a wise and advantageous thing to do to Irish companies at this stage? I know the provisions of the UK are there but they have a very different situation. What different laws have led them into a situation that they were not in? After all, in 1932 we introduced measures to encourage companies to come to the market. Should we not be continuing to encourage them to come to the market? What is "the public"?
What is "an associate of a director"? Is the merchant bank an associate of a director? Here is an extraordinary one:
(d) as part of any fund the capital or income of which is applicable or applied wholly or mainly for the benefit of, or of the dependants of, the employees or directors, or past employees or directors, of the company, or of any company within paragraph (b) or (c).
Does that mean if there is a bonus scheme to encourage employees to take shares in the company they are given preference, as they often are, on offers to the public? Does it mean that the shares they take up are to be excluded? They are not to be regarded as members of the public for this purpose, even though they are given preferential rights as to the percentage they will get on the allotment. I would be against that.
I would have thought there was tremendous advantage to the country in getting the Dublin stock market expanded as much as we possibly could. It is subject to enough restrictions as it is. A lot of Department of Finance research has been done on this over the years. The real sign of prosperity is not when you get manufacturing going; it is when the proportion that is engaged in service and supply is increasing that you have a really developing community. This is one of the services which you can have expanded.
I support what Senator FitzGerald has said. I can see practical difficulties in knowing when the minimum 35 per cent is held by the public. Who are the public? Is it the non-resident public? There are a certain number of English shareholders so that in fact the shares could be held outside the country and qualify under this section. There is a danger of putting Irish companies at a disadvantage in comparison to British non-resident companies who would not be circumscribed by this section. This is something that in practice might need to be looked at. The implementation of this will raise obvious difficulties. Once a percentage is decided on and if it drops below that percentage the company's structure changes. It becomes a close company. How could you keep tabs on this? This would be so especially if there were foreign shareholders involved. Shares could be held in Hong Kong or any place. How would it be decided when they dropped below the minimum 35 per cent?
It is absolutely essential in a free market if you are relying for investment on the public to ensure that there is free sale and free purchase of shares. That requires from time to time a change in the ownership of the shares and the size of the shareholdings. It is a fact that in times of difficulty it is not the timid shareholder who buys. It is the person who has confidence in the future of the company and perhaps buys out some of the smaller and weaker shareholders. In principle I agree with what the Minister is trying to get at. In practice he might find it difficult to achieve his objectives.
We appear to be in agreement that it is desirable that as many companies as possible go public. The best way of achieving that would be to have a much higher qualification than 35 per cent. It could be made 50 per cent. Companies would then have to put more shares on the market.
They might not go public then.
I do not think the figure of 35 is too high. That is what operates in the UK in relation to the stock exchange considerations as to what is the appropriate norm. Senator FitzGerald posed the questions of why a merchant bank might not be an associate of a director. I would not consider that such a bank would be an associate of a director provided the bank in question was the beneficial owner of the shares. It is important that the 35 per cent of the shares be held by persons who have the beneficial ownership of them and that that beneficial ownership is independent of the interest of a director or any of the persons who are set out in subsection (5). Who are "the public" is a question that has been asked. "The public" is everybody except those who are not set forth in subsection (5).
I can accept that there will be difficulties of interpretation and application. That is no reason for not doing the right thing. Any tests applied involve judgment as to whether the facts disclose a breach of the conditions but the number of borderline cases would probably be comparatively few compared with the large number of companies which will come within the observation of the Revenue Commissioners. I am sure that if there is good faith on both sides difficulties can be overcome.
If I talk any more I do not think there will be any good things said about me in the Revenue Commissioners. There is reference to shares "acquired conditionally" and held beneficially by the public. Say there is an offer to the public of 35 per cent and you have to tell them all about it—there is an underwriting agreement under which various people said they would take them up. They are not public. Presumably in the prospectus they will be told the consequences of their failing to take up the full offer. One of the consequences will be the company will be a close company. Whether they take them up or not will affect the position of the company with regard to allowable expenses in the judgment of the financiers as to whether it is a good thing or not. I say with the greatest respect that the underwriters to a share issue must come into or may, at any rate, come into the company; they may become principal members of the company, they may have to retain a bag of them in their wallet before they can get rid of them. Is this a total copy of the UK? I do not think it ought to be.
Question put and agreed to.
SECTION 96.
Question proposed: "That section 96 stand part of the Bill."
This section extends for close companies the meaning of "distribution". The purpose of the section is to secure that expenses incurred by a close company in providing certain benefits for participators are to be regarded as distributions, where these benefits are not chargeable under the existing provisions for the taxation of benefits in kind, and would therefore escape taxation. The section does not apply to expenses incurred in providing pensions and retirement benefits.
Nor, I presume, anything that would amount to gifts under the Capital Acquisitions Tax Bill at present before the House?
We would hardly cover this in a section dealing with a distribution.
My recollection of the Capital Acquisitions Tax Bill is that if there are benefits in kind given under it which are not within the taxability provisions of the Income Tax Acts then they are treated as gifts by the company and caught for gift tax. Could they be caught for this tax as well?
The company would be in the position of not being allowed to substract it from the corporation tax, while the recipient would have to pay gift tax on it, unless it was a benefit of some kind on which he was being taxed under the Income Tax Acts?
The employees will get more and more interested in income tax and corporation tax legislation as time goes on.
Question put and agreed to.
SECTION 97.
Question proposed: "That section 97 stand part of the Bill."
This section is designed to counter the tax avoidance device of withdrawing profits under the guise of interest. It treats as a distribution interest in excess of a reasonable limit paid on or after April, 6th, 1976, by a close company to a director or his associate where the director has a material interest either in that company or another company by which it is controlled. A person will be regarded as having a material interest in the company if he on his own, he and his associates, or his associates by themselves hold beneficially, either directly or indirectly, more than 5 per cent of the ordinary share capital.
The reasonable limit is determined by applying the rate of 13 per cent or such other rates as may be prescribed by the Minister for Finance of the total of the loans or if less the issued share capital plus any share premium account. There is provision to prevent avoidance by an arrangement for companies to make payments to one another's participators.
There is no doubt that Revenue are getting very wise to all sorts of things. I do not object to it at all. The only thing I object to is the high rate of direct taxation and I think that is the cause of all this. If tax on earnings was stopped at 50 per cent an awful lot of this thing would not be going on. Let inflation row ahead to the date when everybody is at a 77 per cent rate and then there will be a roar of a demand to get it down to a 50 per cent rate and we can start having proper economic policies instead of all this.
Some lie and cheat for the money in their back pocket to spend it on drink or whatever other way they want to spend it. I do not see why people in equal conditions should be treated unequally. If some sections are beyond detection the whole income tax code is going to be unconstitutional. There is one question on subsection (4). Does "or such other rate of interest as the Minister for Finance may from time to time prescribe" mean he can push it down as well as up? Are you trying to force up capitalisation? Why is it to be on the lower of the subscribed capital and what was the issued share capital? You brought in the share premium account all right. Does that force people into bonus issues? What is the reason for it? I am sure somebody has contrived something marvellous in the UK to get over this thing. I should like to know what it was in case we could work out some improved system.
Since the figure of 13 per cent was fixed by the Dáil Committee, interest rates have fallen. Certainly in our environment there would be a case for making the interest rate law. It was 12 per cent the Bill originally introduced under pressure. In the Committee I acceded to making it 13 per cent. If one returns to the days of steady interest rates then it would be a very happy situation indeed, but I think we are a long way off that. That is why we have to decide that the Minister for Finance may prescribe an appropriate figure from time to time and he certainly may move in either direction, down or up.
Subsection (4) is simply providing a manner for adjudicating whether or not a particular device in operation in a certain company is a device to withdraw profits under the guise of interest or is, in fact, a legitimate payment of interest. It is very difficult to set out in legislation what should be the precise tests, but there must be some standards by which assessment can be made and that is what we are doing.
I take it the point is that if they exceed whatever is, from time to time, the amount fixed, we will not bother too much about the 13 per cent, that excess is treated as a distribution to the chap who gets it. He is taxed on it on a grossed-up basis whether all his allowances are against it or not, and it is non-deductible as an expense to the extent that it is excessive.
I think it is very desirable to maintain the rate of interest at what I would call a reasonable figure. I do not necessarily mean too low a figure either. I do not think anything should be done to prohibit directors and/or their associates coming to the assistance of a company in serious trouble. If they did not do so, the company might have to go outside and borrow at an exorbitant rate which would not be covered by this legislation. I think a reasonable one might not necessarily mean bringing down the interest at all, but keeping it at a relatively high rate in accordance with the risk involved.
I am afraid that would not help them because they would have to take up extra shares in a situation where the amount of the share capital was below the interest rates.
Question put and agreed to.
SECTION 98.
Question proposed: "That section 98 stand part of the Bill."
This section is designed to counter the device of withdrawing profits in the guise of loans. I think it is self-explanatory.
It is absolutely right. I have no objection to it on the principles enunciated as equal treatment. I think the rate of tax is too high. For example, if he gets £10,000 is this once again grossed up at 35 per cent in the year in which he gets it and then taxable? Does the company pay the tax on the £10,000? Is this slightly different in treatment from the other distributions? I got the impression it was. The company in this case accounts to the Revenue whatever its corporation tax liability may be for the 35 per cent interest to this chap on the £10,000. If he repays the loan he is entitled to a refund of the 35 per cent tax, or whatever he is entitled to. Am I right in that?
£10,000 is grossed up and the company pays income tax at 35 per cent on the grossed up amount. On repayment of the loan the company can claim repayment of the income tax it paid.
The debt due from somebody. This is a debt to the close company. I am a director of a company from which I buy beautiful ties and I could not tell you when I paid their last bill. I do not want to get an assessment written out from the Revenue Commissioners tomorrow morning, but it could have been more than six months ago. Is it quite clear that I would be treated as having made a borrowing from the company? Is that correct, if I did not pay my bills to any company of which I am a director?
If the Minister has to go for a division could we not adjourn until 6 o'clock?
Business suspended at 5.10 p.m. and resumed at 6 p.m.
Section 98 is best explained by an example. A close company makes a loan of £6,500 to a participator. The company must be charged for income tax as if the loan were a net annual payment after deduction of tax. For example, the loan of £6,500 would be grossed up to £10,000 and the income tax assessed on the company would be £3,500, and the net loan therefore would be £6,500. If the loan is repaid the company may claim relief in respect of the income tax which applies to the loan. For example, if the net loan of £6,500 were repaid in a later accounting period the company would then obtain relief of £3,500.
I know a lot of human situations where, for example, old companies exist where the value of the company is quite high, but it is all held by great grandsons of the original founder. Some grandchild of the original founder dies, leaves all her shares to her relatives, and because the death had not occurred before 5th April, 1974, they are stuck with estate duty. The thresholds in capital acquisitions tax are still relatively generous in the case of nephews and nieces but it would not be in the cases of grandnieces and grandnephews, and the only way by which these people, who very often have nothing else but their share in the company, can pay Revenue bills that are due is by borrowing from the company. I can see no subsection that can help in that situation where it is not really a distribution; it has to be repaid at the end of the day. They are holding the company in existence because they are hoping that some of the family's concern may be to prevent their widows living in poverty or relative poverty, because they are outside all sorts of schemes. They never thought of pension schemes, and their profits may not have been good enough anyhow.
I am with the Minister on the general principle of this thing which is an obvious type of avoidance of tax on a borrowing which is really distribution, intended never to be repaid, washed out in a liquidation account or something. Is there any amendment which could give the Revenue Commissioners discretion? For example, even if it was only limited to the case of the kind I have just specified, if the money is needed to pay a debt of the recipient of the loan to the Revenue Commissioners? I would prefer, however, if it was extended beyond that. In English company law a director may not borrow from his company.
If you will forgive me I do not want to dissent from the Minister in particular as this is the first time I am being recorded on a matter of law but one cannot, in England, borrow from one's company if one is a director.
Under our law one can borrow but it must be recorded that one did borrow.
Therefore, if we are talking about director participators we are probably not copying the English section, because that would be illegal in England. I constantly refer to that jurisdiction as England because the United Kingdom is only England and Scotland and Ireland, Wales having disappeared in 1703 under the statutes. However, that is really quite irrelevant. I think Wales is England under English company law. I am prepared to die on the stakes for that.
I have a different sense of values—I am not prepared to die for that but I accept it.
There ought to be some provisions for the Revenue Commissioners being allowed to deem some loan to a participator as not being a tax avoidance operation, which is what we are talking about.
I have a certain sympathy for the kind of hard case that Senator FitzGerald illustrates. The kind of case he mentioned is not very frequent. That is not to say that it is not deserving of our attention, but it would be extremely difficult to provide for an exemption in this legislation for dealing with cases on the grounds of hardship such as he has outlined.
There are many other cases where persons may receive assets which involve a liability to tax. If the burden is unacceptable the gift may be repudiated—that may be asking for too much in relation to a family company to which one may have a certain loyalty, apart from being wishful of receiving benefit. One could see that the appropriate thing would be to use the assets so as to provide means whereby tax could be paid.
I would prefer to see the operation of this legislation and, indeed, the other legislation—the capital acquisitions tax—and if particular difficulties are thrown up in light of the experience they could be dealt with. I have said this on more than one occasion and I have always said it with some hesitation. To speak in this way might suggest a certain sloppiness of mind or a lack of readiness to anticipate the difficulties. One hesitates to widen the area lest by so doing one could facilitate avoidance and I hope that, even if I am succeeded by somebody else before the eventuality which Senator FitzGerald pictures that my successor would be similarly motivated to see if relief could be provided in the circumstances outlined.
I am happy with the personal indication of the Minister's view, but we had ministerial statements on the operation of the wealth tax. I have a case at the moment with the Revenue Commissioners of somebody who died who was liable for wealth tax, who was in a mental state at the time of the obligation to file his returns. I made an estimate, as best I could, of what his wealth amounted to, sent in a cheque and said that I was just about able to persuade him to sign the cheque but it was not possible to get him to assess the present state of his affairs. I asked if I could be assured that I was doing the best I could in the circumstances and that no interest would run. I based my estimate on figures which had been given some years before to me for another purpose. I have a formal reply from the Revenue Commissioners saying that there is no statutory power to enable them to relieve the estate from the obligation to pay interest.
That is not just or constitutional. I made the best guess I could as to my client's liability but I have this formal, stylised letter saying that there is no statutory power in the Revenue Commissioners to do this. I am faced with a difficult situation— and I have one in mind—in relation to this section where I know there is no place where a certain man can get money. He has had to reduce the amount of food he eats every week in order to exist at all, but he has a block of totally unrealisable shares. There is no means by which he can get money to pay the tax due in his circumstances except by borrowing from his company.
I should like to see written into this section some obligation on the Revenue Commissioners to have regard to circumstances where there was no element—let us put it as extreme as the capital transfer abroad provisions are—of tax avoidance detectable in the operation. If there is, kill it. I go as far as that and, God knows that goes very far, although it is operated quite generously, I understand, in the United Kingdom.
I am unable to say anything about a possible successor of the Minister but there is a difference between ministerial statements and statutory rights. The Revenue Commissioners should have the right to make a concession where they are satisfied there is no tax avoidance involved in the borrowing. This is not the United Kingdom of Great Britain and Northern Ireland. This is the Republic of Ireland and the vast majority of companies to which this legislation will apply are entirely different from the companies, and our social structure is completely different and the stability of our democracy depends on different factors and is much stronger because it depends on these factors than in the United Kingdom and we should seek to keep it as it is, in my view, that of a conspicuous Fine Gael conservative Senator.
The Senator is asking that the Revenue Commissioners be given power to make judgments which they are not in a position to make. There are many factors which the Revenue Commissioners would have to consider before making an assessment of the kind which Senator FitzGerald suggests. First of all, they would have to consider whether the shares were marketable, whether they were adequate security against borrowing from a bank. Both of these would be imposing on the Revenue Commissioners judgments which they should not be called upon to exercise.
A further consideration might be whether or not the person liable to tax had other wealth, had other means. Such a person could have other means which might not be brought to the notice of the Revenue Commissioners for reasons which might not be proper.
I am not going to impugn the disposition of any person who is making affidavits, but they of themselves might not be adequate evidence of the ability of a person to obtain credit in order to pay tax.
The element of gift is involved in what Senator FitzGerald is suggesting. Perhaps he is thinking of family obligation to maintain what the family had built up but there is nonetheless, the element of gift. If a burden is unbearable, if the gift offered is unacceptable, it may be repudiated and the liability to tax does not arise. The Senator may say that there may be obligations associated with ownership of the assets which cannot be lightly disregarded even though burdens and worries may attach to acceptance of the assets. All these show the complexities that have to be faced and it is not possible to deal with all these situations in legislation.
Senator FitzGerald tells me of a situation which has come to his knowledge because he is involved in it in the operation of the wealth tax. I knew nothing about it until he mentioned it here today. As we know, the Revenue Commissioners operate in a totally confidential atmosphere and it would not be usual for such a situation to come to my notice unless and until a problem appeared to be unresolved. In that case, the Revenue Commissioners, in discharge of that great tradition which is theirs of serving the public interest impartially, would bring it to my notice. Then it could be dealt with in the annual Finance Bill.
Some of the issues Senator FitzGerald has raised would fall for consideration in the Finance Bill rather than in this legislation. We are moving here to counter certain devices which could easily be used in order to avoid the proper liability to tax. Senator FitzGerald has said that he is with me in this objective but he has quoted some hardship cases to suggest that the law should be softened in some way to recognise those hardship cases. It would be very difficult to devise, certainly in this Bill, procedures which would take account of the situations which he mentioned, but I would not be averse to receiving representations on this matter and dealing with it in subsequent legislation if even half the fears of Senator FitzGerald were to be realised in practice.
A society is disgraced if one innocent man is executed. I very much appreciate the Minister's attitude in saying that he will look at this for future legislative change, but let it not depend on reports to him by the Revenue Commissioners if there are many people affected by this and a lot of grievance. The fact which the Minister, the Revenue Commissioners and the draftsmen of this Bill should have regard to is that it has been permissible under our law to make loans to directors and it has not been permissible for 25 years to make loans to directors in the United Kingdom. A different view should be formed as to the way of dealing with the loans to directors where they have been legally permissible. Whether that was good law when enacted in 1963 or not is another matter but it means that there are a whole series of situations which were perfectly illicit all the time, which have been illicit in the United Kingdom. It is perfectly clear that the amendment I am looking for is far beyond anything that could be got in this Bill.
But let the Minister's decision on this be determined on questions of principle. There ought to be recognition of power in the Revenue Commissioners to seek evidence of any kind they like in a hardship situation.
We have a section in the Capital Acquisitions Tax Bill about gifts made which are normal and reasonable having regard to the income of the donor. That is fine. That has worked marvellously since 1894. There were no affidavits other than the original affidavits found in the Schedule because the Revenue Commissioners had presumably a sensible view and the taxpayer was always the recipient of the gift in that case but it always satisfied the Revenue Commissioners. All we want is not to be treated with a stereotyped letter saying there is no statutory power in the Revenue Commissioners to deal with this matter. It is very unusual, and that is the 1894 estate duty code, to leave such a situation that there is not even provision for appeal on the matter. Their decision as to what was normal and reasonable was final but it was always fair but times have changed. Maybe it should be different now. However, whether it should be subject to appeal or not, I would be as satisfied if it were normal and reasonable as determined by the Revenue Commissioners, and the Minister has been absolutely right.
I could have nearly written out the factors that will have to be taken into account. I see that an existing borrower is going to be affected by this on the 5th April next and there is no question whatever of the person being able to repay it. He has no cash. He owns his house subject to a large loan. He lives as narrowly as he can. He draws a very small income from his company and he is going to be deemed to be subject to this as a distribution in the next 12 days. It cannot be fair. The man's name did not even enter my head until I looked at this section and I suddenly realised that he was affected and then it struck me that many other people may well be affected and may not know it.
It is not good enough to have this left to extra statutory concessions which we know are given, and let us face it, are generally given in response to pressures of pressure groups or an imitation of the UK practice or for some other reason that we have not been told. Why do we not get a list of extra statutory concessions published such as is available in the United Kingdom? That would be a great help to us if we knew that it was not in the section but that there was a practice of giving the concession. If I am wrong in that, I would be glad to be corrected and I would be the first purchaser tomorrow morning of the publication in the Stationery Office.
It is very important that we get rid of this idea that all is going to be well because the Revenue Commissioners are noble men, as they are, and I am not suggesting for one moment that they are not. But one of the reasons for the nobility of the Revenue Commissioners is that they firmly face you with the proposition. Their duty is to exact tax in accordance with the provisions of the statute. I have never had the basic reason for extra statutory concessions and so on formulated to me by our Revenue Commissioners but I am sure it is jolly good; it is in some way related to what is called policy. But it does mean that persons are not looked at because they are Mr. A and Sir J. Their dedication to enforcing the statute is very important. I would like to have a section giving the full authority because they could be faced with a Government that did not want them to exercise that authority at some stage, and I would rather see the power vested in a body which has proven by past practice the concern to be objective and impartial between citizens who are taxpayers.
I do not know what the Revenue Commissioners think of the revenue laws they are required to administer but I suspect that, looking through a lot of the provisions of this proposed law, they are very concerned, and the Minister ought to be concerned, too, about the impact which any variation in the proposals would have on the administrative ability of the Revenue Commissioners to deal with it. They should not shrink from taking on additional administrative duties merely if their shrinking from doing that is going to leave injustice done between persons. This is very very important. I do not want to call on the Minister to say anything more than he has already said regarding this.
All I can say about anything that Senator FitzGerald says, is "Well spoken" and I will keep it in mind.
Question put and agreed to.
SECTION 99.
Question proposed: "That section 99 stand part of the Bill."
This section provides that where a company has been assessed to income tax under section 98, releases or writes off, the whole or part of the debt created by the loan or advance, the person benefiting by that release would be regarded as having received at the time of the release income of an amount which after the deduction of income tax at the standard rate is equal to the amount written-off or released. I think there cannot really be any dispute of that.
Question put and agreed to.
SECTION 100.
Question proposed: "That section 100 stand part of the Bill."
Section 100 defines certain terms which are used in this part for the purpose of identifying income liable to the surcharge under section 101 on the undistributed investment and estate income of close companies.
I would like to vary the whole tone and theme of my previous contributions at this stage by saying that this is a most welcome section. I take it to be the recognition of one of the reports of the commission which said that in the whole scene of Irish private and public trading companies there was not an excess of retention. I take this as only seeking to catch the income which is not required for trading operations?
I am sure all the Senators, including those sitting opposite, would wish to join in this because it is of particular public importance that this should be recorded everywhere, that the trading companies are being relieved. There is still, in relation to a period that is passing, a surtax provision prevailing but after the commencement period of this measure that will go and all trading companies can do what they like with their trading profits without any share of the surtax direction. They are only caught, as I understand it, for the surcharge in relation to what their rental and estate income is, how that relates to what they distribute. If my understanding of that is correct, I am sure cheers would be audible, but they are not in order in the Seanad. However, there should be cheers ringing out on behalf of the traders of this country for that, who should plough it back, get it used in business to generate further profitability and employment. I want to say that; it is a most important and valuable decision and a very different decision from the one incorporated in the United Kingdom legislation. Whether motivated by administrative reasons or any other reason, the decision is an excellent one in view of the reports and all we know about Irish corporations as being desirable and good. Having said that, I do not want to confuse the issue. Does the Minister or any other Senator wish to add anything further?
Only to thank Senator FitzGerald for the generosity of his remarks and to say that he has correctly understood the position.
I should like to support Senator FitzGerald in his remarks to the Minister and his officials. Does this apply to all forms of income in a trading company, including investment income or income from estates?
What we are doing in section 100 is giving the definitions which are necessary in order to understand the operation of section 101 because that section puts certain limitations on income other than trading profits.
Purely for comprehension—and it is rather important—under section 101 is there any question, because of the definitions which arise in section 100 which we are enthusiastically debating, of a surcharge arising on the recipient, that is to say an Irish company which receives an export tax relieved dividend or a Shannon tax relieved dividend or even a patent tax relieved dividend? In other words I should like to know if this surcharge is so framed and the definitions of investment income are such, and the formula applied to them is such that the surcharge cannot catch—as I think it does—the tax-free element resulting from the export sales relief.
Up to now, there has been great stuff in the parts of the Bill which we have gone through so quickly on the assurances that they were restoring, restating and improving the English or the existing law, but now we are on something new to which there has been no reference at all unless we rush ahead to section 155 which, I imagine, will contain a definition of surcharge— strange to relate, it does not, but surcharge is bound to be somewhere; it would hardly be just in the side note. Yes, it is referred to here. Say, for example, I had a company that took up all the shares in a company that started making tennis rackets for export to South Korea and did tremendous business. The company had never paid any tax. Now, I have gone into another business and am making cricket bats for sale on the home market, or perhaps guns or explosives, armaments under the European proposals for organising the armament industry, which I think should not be located here. When we come to the distribution of the income of the company which invested in the tennis racket exports to Korea, does this mean that if it does not distribute as much as the income it received from the exports that it is caught for a 20 per cent surcharge? If so, it would be a departure from the previous Acts with regard to export tax-relieved companies, Shannon relieved companies. It might involve the Government in obligations and in any case it would be entirely wrong. The formula for treatment of investment income—I am almost surely wrong in my superficial reading of the section—is such that the dividend is tax-relieved because of the fact of that the source is totally tax-free it has been taken care of. If it has not, something should be done about it.
Clearly, no problem arises where a trading company retains its trading profits.
After that, there may be various creations for a variety of purposes. I can see that difficulties can then arise depending upon the income sources of these other companies and the manner in which they distribute or retain income received by them. We have a number of operations under old procedures which change once the procedures change. I would expect that there would be different arrangements of companies and personal wealth holdings as a result of this Bill and other Acts which have recently been passed. It is wrong to try to create a new Bill to fit into every known legal business and financial entity. That kind of thing is seldom possible; to the extent that we have tried to do it, it is an explanation for the length and complexity of this legislation.
One must, if one is introducing a new form of tax, try to deal with the fundamentals, leaving people to react to those once they are very clearly stated. I think they are very clearly stated in this Bill. We will need some years of experience before we can say what adjustments are necessary to meet all the complex situations which may arise in the course of business arrangements following this legislation. It would be wrong to try to adjust the legislation to fit every known arrangement which, in many cases, is no more than a reflection of laws which we are now changing.
I take the Minister's statement as meaning that what I said was right and that the surcharge will affect the export tax-relieved dividend. I express the view now that it ought not to and that there is no experience required to change that. That export tax relief will have been in existence for 20 years in October or November of this year. There should be no means whereby people—and we are taking in a lot of Irish institutions that have invested in export tax relief situations; trading companies who have done so—are going to find that their distribution rule is going to be affected without regard to the fact that they bought these shares on the basis that they were going to be tax free, subject to whatever were the provisions applicable to themselves.
I hate being a bore, but we have to be boring because we are introducing a whole new code in section 100. We have to go on to section 188 and then begin the Schedules, which are the most interesting part of it; you can really "get down to it" on the Schedules. The problem is posed by the introduction of the Bill on 27th November. The Minister wants to get it through. It is important that there are a highly ethical group of characters in this country on whose advice people depend. The Revenue Commissioners will be glad to hear that not one word I have uttered today will appear in any newspaper unless I have made some jocose description of the Revenue Commissioners or Senator Lenihan or Senator Yeats or Senator Brennan or the Leas-Chathaoirleach. They can relax.
We are in the position that we have got to run the measure through, except for one section that must go. I think the Minister will have been convinced of the necessity to get rid of a section that comes later and there will be no way of avoiding that. The remainder of them could be amended in a subsequent Finance Bill. I think everybody would recognise the Minister's exigencies. This must be law before 5th April. I do not think it was anybody's fault that it was not here earlier.
Senator FitzGerald overlooks the fact that no problem can arise if a trading company retains its trading profits. That is the legitimate situation in which virtually all companies enjoying export sales relief are. They are trading companies. We are providing under section 101 special provisions in relation to the investment income or estate income of trading companies. Later, we will deal with the non-distributed income of service companies. If income is retained by a trading company or if other income is distributed no problem can arise and that covers the overwhelming majority of cases.
All the criminal laws leave free, thank God, the overwhelming majority of the population. It is the small number of the population who are affected by them which makes it necessary for us to debate them and consider them. With respect to the Minister, I do understand that this is a trading company situation. I completely agree and wholly applaud the provision. I do not think that my invitation to applaud was accepted by the other side. I hope it will yet come. This is a great improvement on the existing situation. In principle, though, I think that the surcharge should be so expressed that the fact that the investment is being made in an export tax-relieved or a Shannon tax-relieved situation should be reflected in its language. I know perfectly well nobody has the time to do that and get it through the Report Stage between now and 5th April. We will be debating the Finance Bill when we should be on our holidays.
I will bear in mind all that the Senator has said.
Question put and agreed to.
SECTION 101.
I move recommendation No. 1:
In subsection (1), line 26, after "excess" to insert:
"but if some or all of the said income cannot be distributed without prejudice to the requirements of the company's business (current, maintenance or development) then so much of the said income as is so required shall not be subject to surcharge".
I put down this recommendation arising out of my contribution and Senator Eoin Ryan's contribution on Second Stage. It deals with a very fundamental matter in that the effect of the section as it now stands is to put a surcharge of 20 per cent on close companies that are operating as trading companies in respect of their undistributed investment and estate income. This is a manifestly disincentive measure. We are talking about trading companies here, companies that are in business and in all cases other than the avoidance-type cases are retaining this income for the purpose of expansion, development and further employment. How does the Minister expect a trading company to accumulate the necessary capital for future development unless it does so in this manner, by retaining and not distributing its income for a period of time until it has accumulated a sufficient investment for further expansion and development that can only be beneficial?
The section runs counter to a very basic principle in furthering commercial life and economic development of the community in that it discourages incorporations. There is a bias against a group of people incorporating themselves in a trading company which is surely a matter that ought to be encouraged positively in legislation. What I and my colleagues suggest in the recommendation is to add in section 101 following line 26, subsection (1):
but if some or all of the said income cannot be distributed without prejudice to the requirements of the company's business (current maintenance or development) then so much of the said income as is so required shall not be subject to surcharge
In effect, that means that retained, undistributed income required by the company's business for the "current maintenance or development" aspects of its business shall not be taken into account for surcharge purposes.
The Minister may improve on the drafting of that. I do not want to get into a drafting argument. The principle is clear enough. The principle is to eliminate any such beneficial and advantageous retention of income claimed by a trading company from the penal surcharge rate.
I can understand the surcharge in regard to people who are using a close trading company for avoidance purposes. I can understand it in the case of an investment company. I am talking about the trading company that retains income for practical business purposes related to investment and development and expansion and further employment. Nothing could be more straightforward than that. I said on Second Stage that this is another example of what has crept into Finance legislation recently, another example of tilting the balance dangerously towards revenue requirements as against economic development requirements. The essence of finance legislation is that a proper balance be maintained between what is required in the way of taxation for revenue purposes and what is required to stimulate the economy and maintain economic development. Here is a penal surcharge designed to hit phoney trading companies for avoidance purposes. Here is a penal surcharge that is drafted on a crude basis in that in addition to rightly capturing the avoidance type of a trading company it also captures in the net the legitimate trading company that is retaining investment and estate income for the purpose of building up a reserve to engage in capital development for expansion of the company or firm.
We have been talking about parallel developments in the United Kingdom heretofore. Here, precisely, is an area where the United Kingdom has far more realistic legislation. I refer to the Finance Act in the United Kingdom of 1972. I refer in particular to Schedule 16 of that Act and section 8 of Schedule 16 which is dealing with the determination of relevant income. Relevant income in this case is the income of a trading company and, dealing with the situation arising where the State income and the investment income—the relevant income as the British Act calls it—the relevant income, is not distributed but is retained for the purposes mentioned, for the expansion and development of the company. What is proposed in Schedule 16, section 8 is precisely what we are seeking to secure in this amendment, that is to remove from surcharge that element of the retained income that is required for the company's business, current maintenance or development.
The Minister, in regard to a point made by Senator FitzGerald, mentioned that it was not the Revenue Commissioners' job to make value judgments in making an assessment. The British Revenue Commissioners do not appear to exclude themselves from making such a rational judgment when it comes down to determining whether or not the retained income of the kind mentioned is legitimate or illegitimate. As far as our Revenue Commissioners are concerned, as the section stands the legitimate retention and the illegitimate retention of income on the part of trading companies are regarded in the same light. The British in their Act of 1972 have shown a far more enlightened attitude. I quote from their Schedule 16, section 8, subsection (2):
In arriving at the relevant income for any accounting period
(a) where under sub-paragraph (1) above,
that is relating to retained income by credit companies
regard is to be had to the requirements of a company's business, regard shall be had not only to the current requirements of the business but also to such other requirements that may be necessary or advisable for the maintenance and development of that business but for this purpose the provisions of paragraph 12 below shall apply.
(b) the amount of the estate or trading income shall be taken as the amount included in respect of it in the distributable income.
That, in effect, means that regard is to be had by the British Revenue Commissioners to the requirements of a company's business, not only to the current requirements but also to such other requirements as may be necessary or advisable for the maintenance and development of that business. The Revenue Commissioners are obliged in the United Kingdom under the Finance Act, 1972, to take these criteria into account. These are precisely the criteria that we have written into our recommendation asking our Revenue Commissioners to take into account the requirements of the company's business, current, maintenance or development in coming to the extent of the non-distributed income which will be liable for surcharge. The purpose of the Schedule to the British Act is achieved by our amendment or, possibly, could be better achieved by an amendment drafted by the Minister's advisers, of preventing the surcharge from being imposed on the income of a legitimate trading company, claimed legitimately by that company, not for avoidance purposes but for the beneficial economic purposes of the development and expansion of that company.
If the Minister looks closely at this matter and at the relevant sections of the British Act of 1972 he will see that improvement can be made by adopting this approach. It certainly makes sense in our present economic circumstances that we should lean towards the encouragement of a trading company adopting such an attitude towards this retained income. It would seem to me to be a logical type of incentive to write into this section. It would certainly appear to be sensible not to lump the tax avoidance trading company with the legitimate trading company. It would seem, on its most elementary basis, very wise not to lump these two together and give them the same treatment right across the board as is suggested under the section as it now stands.
Some attempt should be made to differentiate between the trading company that is there for the purpose of avoiding tax and the trading company which is there for legitimate business reasons. If it involves the Revenue in a little more work in coming to certain judgments as to whether the income is being retained for business requirements, that is a very excellent exercise for the revenue Commissioners in arriving at just such a judgment as to whether a company are making a contribution in the sense of retaining income for legitimate business purposes.
I can now understand why Senator Lenihan and his colleagues did not join with me in applause of the section which was proposed and which we discussed in the debate on the previous section. I think it is a very good trade-off for Irish companies to get freedom from section 530 of the Income Tax Act as amended by other Acts. I know that there probably has been a loss of revenue, as estimated in the 1972 white paper with the yellow cover, called the Yellow Paper, as being half a million. It was probably considerably more. On Second Reading I mentioned some technical defects in the section that were known to me and there are many more known to the Revenue, I am quite sure. I think a trade-off of this kind is very welcome.
I hope Senator Lenihan and his colleagues will not think I am ungenerous in my response to this recommendation because they have been sympathetic to some of the points I have been making. From what I hear of the UK provisions in the Spouses and Childrens Bill, there are people talking about the bishops provision for justices with misshapen provision for justices with mis-shapen feet, like the Lord Chancellor whose decisions depended on the length of his foot, coming into every houseshold. I have my own considerable doubts about that. It is a section of which I happen to have taken a copy. As it is to be operated in the United Kingdom it means that in very many cases it depends on the power of advocacy of your auditor and the quality of mind of your inspector as to what you get away with. It seems to me we have in this section a very reasonable and easily operable provision to deal with trading companies in general.
We are talking here about the vast majority of companies. If that burden of administration was lifted, there is a system which is an easy formula, taking one year with another, which companies can conform with, it is not too much of a burden to get rid of this over-hanging thing which is in section 130 to which I refer. There are two types of costs involved. First of all there is the question of what did you pay the professional gents who advised you to organise your affairs in this way so that you did not come under the Act. What did you pay in taxation to pay the Revenue Commissioners' staff who were doing the business, or were not doing much of the business, if I understand the situation here, because of the technical effects of section 530. They were using, understandably, a kind of blackmailing tactics. They knew that these people were avoiding distribution and they threatened surtax directions.
There were all sorts of ways of stopping them being used and they being wise men did not go on. I imagine they lost their heart in the section. In the UK we just have this applicable to all trading companies. There is a considerable burden in the cost of administration involved in this. If we were to pay all the Revenue Commissioners special sums, which I do not think we ought to, a secret service fund for the Revenue Commissioners to go off to all these management conferences and tax institute meetings and find out what are the facts, that would be a terrific help, but that would merely inform them on legislation. It seems to be one of the points which Senators were thinking about when tabling this recommendation. I would not be in favour of this.
I do not propose any recommendation to this section. I do not hesitate to disagree with Senator Halligan from time to time but I might be inclined to recommend something on the lines of his idea of differentiating in some way between money put into some scheme which would relate to a cyclical situation which would make money available immediately through the Central Bank to the Government and which would be drawable when slump situations arose. This he said was a Swedish thing. I have never been to Sweden anyway and I do not see what inspiration we could get from there with the suicide rate and the divorce rate there.
I would oppose this recommendation but would go on to give notice to the Minister that unless he proposes an entirely different kettle of fish and withdraw—which would, indeed, be the sensible thing to do—section 162 and reintroduce something to deal with any abuse that has not already been cleared by close company provisions in the Capital Gains Tax Act, I would recommend some alternative to this section, the very minimum which would leave contented the very responsible people in a large number of responsible firms. I would suggest the adoption of something like this recommendation, and as far as I can read it it is a very well drafted proposal. Let me compliment Senators Eoin Ryan and Lenihan.
There is a difference in talking about administrative costs when talking about 10,000 and 50,000 companies, or whatever the numbers may be. One particular operation could be done by one or two men whereas dealing with all the trading companies would be a terrific organisational operation. I should have thought that what we are proposing is better than what we have. There is a difference between Irish and British circumstances. There is a different test altogether and the administrative cost in the other place will be very different because here it will be a small number of companies, perhaps so small that the administrative costs to the taxpayers could be small, and in relation to taxation I cannot emphasise the importance of this.
I remember General Seán Mac Eoin saying years ago when talking about employment, "Of course we could increase employment enormously if we put a subsidy on the people who would engage in the robbing of banks". It is not the sole test. What are they doing? What is the benefit to the community of their operations? The benefit to the community has to be borne in mind later by the Minister when he comes to look at another section. On this one I would be against this change recommended because of what I am told is the situation. The Senators correctly describe the law as it is in England as an everhanging problem all the time for companies there.
In so far as descriptions have been given by Senators, they are not unfair, but there has been one very significant omission from these descriptions and that is that whereas British legislation has a provision somewhat on the lines of the recommendation, it has no system of surcharge such as we are proposing, which will impose a tax of no more than 60 per cent, which is the limit of the tax on the non-distributed profits. In Britain they have apportionment provisions which means that you look right through every company situation to see who is the ultimate beneficiary.
In the kind of cases which we have in mind here, the rate of tax would be well in excess of 60 per cent. It could be up to 77 per cent. Fair enough, one might be disposed to consider the recommendation if the apportionment provisions were brought in as well, which would expose people to the full whack of tax right through to 77 per cent. I notice that is not proposed. What is requested is that the benefits of the surcharge provision, which imposes tax at 60 per cent, be retained but that the advantage to taxpayers under the British system be also introduced. That is wanting to have your cake and eat it at the same time.
The purpose of the recommendation as I understand it is to secure that any distributable investments or estate income of a close company which can be shown to be required for the maintenance or development of a company's business will be excluded from the scope of the surcharge provided for the section. The reference in the recommendation to the company's business would include the business of a company which is not a trading company and whose income consists wholly of investment and/or estate income. It would also cover the investment and estate business of a trading company which has investment or estate income.
The recommendation states that if it can be shown that part of a company's income is required for the maintenance or development of its business, any balance shall be distributed and if that balance is withheld from distribution that circumstances should not prevent it from being treated for tax purposes as if it were distributed. It is, therefore, implicit in the recommendation that a system of appointment should be introduced to cater for the case where all or part of a company's income is withheld from distribution and the income so withheld is not required for the purpose of the company's business. If section 101 were to be amended in the manner suggested, a corresponding amendment of section 162 and the introduction of apportionment provisions as respects income withheld from distribution and not required for a service company's business would logically and inevitably be forced to be inserted as necessary in section 162.
I would recall to Senators paragraph 96 of the second White Paper on Company Taxation which was published in March, 1974, stating that the surcharge on close companies was proposed because it would have the advantage of countering tax avoidance by the retention of investment income without the necessity for the very complex legislation which would be required if the retentions were to be apportioned to shareholders so as to impose income tax on the retentions at the rates appropriate to the income level of the shareholders. It should be noted—and it cannot be sufficiently emphasised—that the surcharge does not extend to the trading income of a close company. Senator FitzGerald has recognised this and has regarded this as a very worthy provision. The criticisms of sections 101 and 162 appear to indicate that a more refined instrument than the surcharge for taxing undue accumulation of income by close companies should be provided. At least that is how I understand the arguments advanced here and in the representations which I have received. If this is so, the only logical alternative would be the introduction of apportionment provisions applicable to all close companies, including companies which are trading companies. That is the position in Britain which is not what we have proposed here.
If these provisions were to follow the lines of the corresponding United Kingdom legislation the need in the case of a trading company to retain trading profits for the maintenance or development of its business would have to be taken into account, and subject to this the distributable income would, broadly speaking, be taken to be 50 per cent of the after tax estate or trading income and the whole of the after tax investment income.
To sum up, I can understand and to some extent sympathise with the arguments advanced behind the recommendation, but it simply could not be taken and blended with the proposals being made in this Bill. We would have to handle the Bill differently. We would have to introduce apportionment provisions and we would have to have a closer look at retained profits of trading companies other than what they might have undistributed from investment and estate income.
I thought that the way we were approaching it was a better one. I thought it was a reasonable way of handling it because it gave advantages to companies which certainly one needed to encourage to retain profits for further development and for expansion of trade and manufacture. I have already expressed in the other House and at meetings I have had the privilege of having with people making representations in this matter that I was anxious to allow as a firm solution to the problem but others would have to accept that if we are to find some reasonable solution to all that has been urged, there will have to be a little give and take. People cannot just be asking for additional benefits, taking all the advantages for the taxpayers which arise under the British legislation and asking that we retain in the Bill all the advantages that we have for the taxpayer in our Bill which are not contained in the legislation which is so liberally quoted from another shore.
I agree with the Minister in so far as his brief related to the section that we are now discussing but I judge, rightly or wrongly, that this is the better system than the alternative which is in Britain, which is costly all round, to the Revenue, to the advisers, to the taxpayers. When we are talking about the best interests and that people must make concessions, I hope the Minister is not thinking that anybody in this House is receiving some enormous fee for putting a case on behalf of anybody.
I am sure Senators Yeats, Lenihan, Russell, Garrett or anybody else in the House is here to try to produce the best legislation that can be got in the circumstances we are in. If we make proposals here and there it is not a trading-off business. We are trying to get what is best for the situation. I happen to think that the Minister has got the best for this particular situation. I do not shrink, in other circumstances for other types of companies, from apportionment provisions. I do not think that the Minister mentioned section 162 but I mentioned it.
For any of the persons concerned, because of mistaken public policy of treating professional people as if, because certain people have done what they were perfectly legally entitled to do and were advised to do so to provide for their families, it should have been headlined in the Irish Independent as if they were some sort of monsters. All they were trying to do was to provide for their families. They have no superannuation and their opportunities to provide superannuation is damned limited by past legislation. I am not joining in that sad attack on these people. They did what they were entitled to do and they are not able to do it any more and that is closed off. But when we get to section 162 we will be dealing with a small number of people and in principle it is wrong in any way to these people of character and people who are subject to obligations as to performance that they can be struck off the rolls.
We had a debate here yesterday about the consequences to certain people of going a course—other than the one the Minister proposes to go incidentally—and ended their careers. There are many people at the beginning of their careers who are caught doing the sort of things that get them struck off the rolls and off some of the registers that we are on. In damn principle I object to any of the people on these registers being put into a position where they will get discriminatory taxation. I am interested in its effect on the country and the attitude to people. There is no capital, there is no large estate, there is no seedling growing in 60 years into timber. In 60 years that timber would produce something remarkable, and where is the provision for it in our tax legislation? How could I or Senator Russell provide pensions for ourselves? We cannot do it and there is no legislation there to enable us to do it. If people find themselves in these situations, they should be encouraged to make as much money as they can and some regard should be had to their past. There is a professional firm in this city at the moment that is being sued for £2½ million. There is no Revenue Commissioner or any Minister in that position. These are risks we must take. I want to oppose Senator Lenihan's recommendation and to reprove it.
I agree with Senator FitzGerald when he said that the point of view he expresses on the recommendation is relevant also to section 162. I propose to agree with him on section 162 because I believe the surcharge is a disincentive and an unjust surcharge as it is in this case vis-à-vis bona fide trading companies. My information about Britain—and it can be verified—is that bona fide trading companies in the United Kingdom since the operation of the 1972 Act to which I referred, in practice find themselves relieved of surcharge in regard to income retained for business purposes. It works out in practice.
I agree with the Minister that this is linked in with apportionment provisions and that makes it fully effective. I put down the recommendation so that we could have some light on this matter. It is one with which a future Finance measure will have to deal. It is obviously undesirable that bona fide trading companies should be regarded in the same penal light as relates to tax avoidance. The two should not be regarded in the section in the same way. At some future date the Minister will have to make an effort, with apportionment provisions to make it effective, to draw the legitimate distinction and remove the surcharge from being a penal imposition on bona fide trading companies retaining funds for purposes of development and expansion.
Having said that, I withdraw the recommendation and I will join battle with Senator FitzGerald on section 162, when we will adumbrate the same point of view.
Recommendation, by leave, withdrawn.
Section 101 agreed to.
SECTION 102.
Question proposed: "That section 102 stand part of the Bill."
This is a definition section which explains associated company and control. I would be happy to answer any questions if any queries arise.
I have a query arising because of not really understanding the words in brackets in (b) of subsection (2). First of all, you have "...a company is to be treated as another's ‘associated company' at a given time..."—That has got all sorts of implications—"...if, at that time or at any time within one year previously...." I presume that is one calendar year under the Interpretation Act or is it a financial year? I know the Interpretation Act was amended to create an awful lot of confusion. A calendar year fits in with the period of accounting for the purposes of this section.
Which is the same except for the first year. What happens the first year. What about the three months?
Sorry, it is a 12-month period but it is not necessarily a calendar year. It is not January to December necessarily. It is a 12-month period.
We would not, to avoid confusion, say within 12 months previously. There are all sorts of periods. There is the nine months in the financial year 1975 and there are 12 months for all the other accounting periods which have to be apportioned. One of the great recommendations of the White Paper was that we would get rid of apportionment if we had a single tax, but we are going to be apportioned to the end of our lives apparently.
At any rate, while the Minister is thinking about that, what does "that time" mean? Does it mean at a given time? That is when the question of association arises. Section 102 (1) reads: "... at that time or at any time within one year previously, one of the two has control of the other, or both are under the control of the same person or persons." Then we have to go on to "control". Is "control" for the purposes of this part only?
You have to be very witty to keep up with the lot of you. This is only related to close companies and has implications that a lot have escaped either the Revenue or some other people. Subsection (2) reads: "... a person shall be taken to have control of a company if he exercises, or is able to exercise or is entitled to acquire, control...." Acquire what?
But there is a comma after "acquire". The comma must go in. The printer has to do something with that. He must not put a comma after "acquire". I have to look to the Leas-Chathaoirleach to give us a ruling on this. But I think the comma after "acquire" must go. Even if we only got a comma out of this it would be no harm. After "control," it reads: "whether direct or indirect, over the company's affairs, ..." What does "company's affairs," mean? Is that defined anywhere? Who has control of a company's affairs? Is it the shareholders who have control? Is it the directors? They are allowed do some things and not others. They can all be booted out in the morning. Who else has control of the company's affairs? It goes on: "but without prejudice to the generality of the preceding words" which are so general, "if he possesses or is entitled to acquire—"—I agree with the dash after acquire—
(a) the greater part of the share capital or issued share capital of the company or of the voting power in the company;
Does that mean at any time?
"... or is entitled to acquire". That is an option but, of course—and this is a hopeful thought—we could so organise it that he would not be entitled in law to acquire it. I presume he would have to be entitled in law to acquire it. Subsection (2) (b) reads: "such part of issued share capital of the company as would, if the whole of the income of the company were in fact distributed among the participators ... entitle him to receive the greater part of the amounts so distributed". He is not entitled to escape from the position of being a controller by saying: "Look I am entitled to 51 per cent of that but I do not want it. Give it to my maiden aunt." Does it refer to his present entitlement? We are trying to do here today in a very short period of time what the Companies Act Committee did over a long period of time. I do not know whether the Minister was on the Companies Act Committee, but that went on, I think, for a few years.
It did go on for a very long time. I do not want to be boring the Minister with this thing, but I do want to understand what this means. Does "entitle him to receive the greater part of the amount so distributed" mean that, one way or another, having regard to all the kinds of shares there are in any year, he is the person who is entitled to get the most of it? He is regarded as the controller. Am I right?
Let us come back to things that I could not understand. Does "without regard to any rights which he or any other person has as a loan creditor ..." mean that he is prevented from becoming a controller of the company under the section by creating such rights as would reduce his entitlement to less than the greater part? Does that mean any rights which he or any other person has as a loan creditor? Why has it to be described? The rights of the loan creditor will presumably have to be taken into account before the distribution is made, whether it is he or anybody else.
It is a relieving section.
I am not too worried whether it relieves or not.
Yes. Would the Senator just leave it for a moment? I shall be explaining its effect. You do not look to any rights that may accrue to the person in question by reason of his having advanced a loan. That is irrelevant to deciding whether it is a question of having control.
So that he could have control?
He could have control like any mortgagee. He could have control because he has put the money in on the basis that he is one way or another going to control it. But that is not going to make him a controller of the company for the purpose of relieving.
Thank you. That is very helpful, indeed.
Question put and agreed to.
SECTION 103.
Question proposed: "That section 103 stand part of the Bill."
Section 103 is a definition section for the purposes of this part of the Bill. I will be happy to answer any questions that may arise.
Under section 103, it would appear that a participator must have a share or interest in the capital.
You could have an interest without having a share. Is that beneficial?
By having a share, do we miss the word "beneficial" here? I am not trying to argue for or against the taxpayer at the moment, I am merely trying to understand what it means. If it were a share only——
It must be beneficial ownership.
If it is held through somebody else then he is a participator but, without prejudice to the generality of these words, it includes any person who possesses or is entitled to acquire share capital or voting rights in the company. Companies will get closer together and want to get more open. We were all self-conscious, but companies are going to be terribly tax-conscious. There is a reference here to "any loan creditor to the company". The participator is a loan creditor. He is a participator under that but he is not a controller of the company under section 102. Subsection (1) (c) states:
... any person who possesses, or is entitled to acquire, a right to receive or participate in distributions of the company (construing "distributions" without regard to section 96 or 97)...
Section 96 is expenses for participators, that is somebody paying your lunch bill. They are not to be regarded as entitled to or participating in distributions or any amounts payable by the company to loan creditors by way of premium on redemption. They are included.
Subsection (1) (d) reads:
... any person who is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for his benefit.
In this subsection references to being entitled to do anything apply where a person is entitled to do it at a future date or will at a future date be entitled to do it.
I can see why the British Empire sank if this is what they were at for the last 20 years; giving their great intelligence to this when they should have been conquering new territories and sending Corkmen out to govern firms. I think we are beginning to understand what a participator is. A person could hardly crawl out of that situation, even if he wanted to.
Subsection (2) states:
The provisions of subsection (1) are without prejudice to any particular provision of this Part.
Then you have to go back to the beginning of Part X, Close Companies:
requiring a participator in one company to be treated as being also a participator in another company.
What does that mean? We go back to subsection (1):
For the purposes of this Part, a "participator" is, in relation to any company, a person having a share or interest in the capital or income of the company....
Let us say it is a shareholder, an option holder, a loan creditor, somebody who has a right to get at the income in the future or who has arrangement to get the right. Subsection (2) states:
The provisions of subsection (1) are without prejudice to any particular provision of this Part requiring a participator in one company to be treated as being also a participator in another company.
Would the Minister tell the House what is the particular provision of this Part? This seems to go beyond the section. It seems to suggest that there is some other section in this Part which contains 11 sections. Therefore, if the Minister could find it in any one of the sections, would he say where it is? Does this mean that in another section somebody is treated as a participator in another company because he participates in one company, that the fact that he is a participator under subsection (1) does not prevent him from being a participator because of the operation of the other section?
No. A participator in a company is a participator in an associated company.
The fact that he has not got any of these things does not prevent him from being a participator in that company?
The person has a right to take shares in company A and the fact that the person has not got a right to take shares in company B does not, because of the provisions of subsection (1), prevent him from being a participator in company B.
It will not prevent him if the companies are associated.
I take it that, if companies are associated, it is a different proposition and concept from an "associate" or a "participator"? When we are discussing subsection (2) of section 103, bringing in participators in an associated company under section 102, it is different from the definitions of—we should go back; can we dispense with Standing Orders to go back on the entire list?
Subsection (3) says:
For the purposes of this Part "associate" means in relation to a participator——
Does that mean if I, for example, Alexis FitzGerald, have 5 per cent of a company, or 4 per cent, and my partner, or a relative who will be defined somewhere else, being a wife or a lineal descendant——
The comforts of matrimony will overcome any of the disadvantages of this Bill.
I would not contest that for one moment.
Subsection (3) (b) reads:
the trustee or trustees of any settlement in relation to which the participator is,
We had better look at this very closely.
or any relative of his (living or dead) is or was, a settlor...
You cannot have a dead participator, but the read relative can make you a participator. I think an awful lot of this has to be looked at very closely again in relation to Irish family companies. Maybe there is a desperate lot of tax avoidance going on that we have to capture. The simplest way is to cut off that 27 per cent, reduce it 15 per cent and clear up nine-tenths of this. You get far better revenue. You will be reducing the number of accountants and solicitors who have to devote their time to this kind of rot and everything would be freer.
"Settlement" and "settlor" having the same meaning as in section 96 (3) (h) will be decided when we turn up section 96 (3) (h). It has probably been amended by reference to Part IV of the 1968 Miscellaneous Provisions Act. It all relates to profits or gains from dealing in and developing land. We will have to get a large number of people together to put it all out so it can be read in one piece. These have different definitions. They have been popping into other things. We have had trouble with them before. Because of the definition of "settlement" and "settlor", you are in trouble with regard to certain sections where you tried to curb what you choose to call "tax avoidance" and which I choose to call "exploitance" of tax incentives. You are in trouble because you adopted the definitions which are relative to dealing with trading of land taken from what you conceal under section 96 (3) (h) as being the Finance Miscellaneous Provisions Act, 1968. Who would ever be able to guess that unless he had all the volumes? In relation to our job we should be given some kind of an exercise allowance to keep control over all these.
I want to compliment the Revenue Commissioners. Look at what they have done for us. Admittedly, we have got to employ people, pay them, and get surcharged while we are waiting for a return on their labours to file in the relevant service sections. That is not being done for us by anybody else. It is a desperate business as the Minister well knows. With the Landlord and Tenant Act you have to keep one foot there and one hand there, and you are moving around from section to section. It is a very difficult job. Is there a beneficial exercise in it, do you think, so that we should get an allowance on our life policies from it? I have dealt with all the section. The Minister will never extend "relative" to include an illegitimate, I suppose?
Not until the social law recognises it.
Only in a very limited respect.
That is for tomorrow. I agree with section 103.
Question put and agreed to.
SECTION 104.
Question proposed: "That section 104 stand part of the Bill."
This section empowers an inspector in the normal way that inspectors are empowered to implement the provisions of the Act.
Question put and agreed to.
SECTION 105.
Question proposed: "That section 105 stand part of the Bill."
I would not like to disagree with any part of this section and I do not intend to say anything other than to welcome it enthusiastically.
Question put and agreed to.
SECTION 106.
Question proposed: "That section 106 stand part of the Bill."
This section deals with the manner in which an election may be made or terminated for the purposes of section 105.
Question put and agreed to.
SECTION 107.
Question proposed: "That section 107 stand part of the Bill."
This section sets out the general nature of group relief and the conditions under which it will be available for trading losses and other amounts, such as management expenses and charges on income, which could otherwise be carried forward for set-off in the subsequent accounting period. I might say that the section, as far as I know, has been generally welcomed.
Why a 75 per cent subsidiary?
Where did the Minister get the definition? Earlier the Minister told me where the definition of the 75 per cent subsidiary was to be found. I failed to take note of what he said. It is relevant to the question Senator Russell has asked?
Section 156 has the provision about the 75 per cent subsidiary. The thinking behind the 75 per cent interest is that before group relief is given, it is very important that the entities between whom it can be exchanged are substantially the same persons because the company which would be surrendering, as it were, its entitlement to relief to another company and would be forfeiting something which it might be able to retain to its own benefit in future years. Therefore, it is important that this group relief be available only within the group which is very significantly and substantially one and the same person or group of persons. If you brought it down to 50, then you could have quite a number of strangers enjoying the relief. It could then operate to the disadvantage of minority shareholders in a company. Seventy-five per cent is a fair measure of the kind of common interest that ought to exist between companies sharing group relief.
I am sure the Minister has made the right decision on this. I presume the draftsman has looked at the definition of "subsidiary" in the Companies Act, 1963, which includes a whole lot of other situations, and has also looked at the definition of "subsidiary" in the Northern Ireland Act, which contains another and a different set of provisions which might have a bearing if we are dealing with companies whose residences can be moved. They ought to be all looked at.
They certainly have to be looked at. The Senator may be assured of that. Care has been taken to ensure that "subsidiary", for the purposes of this Act, fits neatly into the corporation tax shoe.
Question put and agreed to.
SECTION 108.
Question proposed: "That section 108 stand part of the Bill."
This section will prevent the abuse of group relief.
Question put and agreed to.
SECTION 109.
Question proposed: "That section 109 stand part of the Bill."
This and the next six sections define the terms used in section 108. The purpose of this group of sections is to identify the real and ultimate equity interest. It requires that to qualify for group relief the parent company must have the required percentage of the ultimate equity interest.
It departs, does it not, from the company law definition of inequity or does it repeat our company law?
Question put and agreed to.
SECTION 110.
Question proposed: "That section 110 stand part of the Bill."
This defines profits available for distribution.
Question put and agreed to.
SECTION 111.
Question proposed: "That section 111 stand part of the Bill."
This deals with group relief in relation to notional winding-up. The section confines what is meant by assets available to another company on a winding-up. It is designed to prevent abuse of group relief.
Question put and agreed to.
SECTION 112.
Question proposed: "That section 112 stand part of the Bill."
This section is designed to prevent possible abuse. It applies in the case where an equity holder whose rights in a distribution of profits or assets on a winding-up are limited by reference to a specified amount or amounts.
Question put and agreed to.
SECTION 113.
Question proposed: "That section 113 stand part of the Bill."
This again is another section which is designed to prevent another possible abuse. The pointers to these abuses have been erected in other countries and enclosed by appropriate legislative measures. We are ensuring that nobody attempts to follow in the same lines here. It would be a futile exercise because we are closing off the abuses before they ever develop.
The Minister has not closed off any abuses here that have not been closed off.
Question put and agreed to.
SECTION 114.
Question proposed: "That section 114 stand part of the Bill."
This section provides that a beneficial percentage entitlement may be traced through a chain of companies. Section 156 says how it is to operate.
Question put and agreed to.
SECTION 115.
Question proposed: "That section 115 stand part of the Bill."
This section defines "the relevant accounting period" and provides that a loan to a company is to be regarded as a security whether or not it is secured and, if it is secured, irrespective of the nature of the security. It operates to relieve taxpayers.
Except that it applies only to companies whose accounting period begins after 5th April, 1976.
Yes, but they become loans if they have not been paid off.
The loan is still in existence.
I read at one point that the thing came to be treated as a loan on 5th April. I am correct in thinking that all loans in existence on 5th April, 1976 or the provisions of such loans will be treated thereafter under this Act.
Senator FitzGerald is right. If the loan is in being after the date in question it will fall to be considered. It is not a question of it having to originate after the date in question. Once in being it is still a loan. It is now a family loan.
It is now 24th March. These loans are to be cleared off by what date? Is it 6th April?
That is right. I do not know what the Senator's purpose is.
There should be a special direction given to the Central Bank to make provision for the repayment of these loans, or the whole system of company operations will collapse. There are people who owe money at this moment and do not know what they owe or own. They put in £100 and it has grown to £10 million. They never thought of converting it into capital.
We are dealing only with loans in relation to group relief. We are not dealing with loans of close companies.
We are not dealing with them.
This is part XI, dealing with group relief.
I know it is but I am remaining with the question. I am thinking about that tie which I got for Christmas or my birthday. If I have not paid for it will I be paying 35 per cent on its value?
I am sure the Senator has not taken any more credit than is the normal custom of the trade. If that be so it would not be treated as a loan.
The point is that I got an answer that the loans we are talking about, dated 5th April, are for group relief only. The loans we are talking about are distributions apparently and will be crystallised if there is a state of indebtedness there on 5th April. Is that wrong? We shall have to hold this Bill up until May or June, if anyone has the stamina.
We are confusing one another. We are confusing group relief and close company provisions in relation to loans. We are at the moment dealing with group relief loan provisions.
I am perfectly clear about that. I wanted it to be confirmed that I was not confused. Section 98 which deals with close company loans means loans extant on 5th April, 1976.
I am right. There is confusion. I said that section 115, which I was dealing with when I had a query from Senator Russell, would apply to loans irrespective of the date on which they originated. If they were extant on the date of operation of this Bill they would come within the ambit of section 115. But section 98 has to be looked at because they are the loans which have to arise after 5th April, 1976. I should say that the material date is 27th November, 1975. Section 98 subsection (8) says:
Where on or after the 27th day of November, 1975, but not later than the 5th day of April, 1976, a close company makes any loan or advances any money to an individual who is a participator ... the company shall be deemed for the purposes of this section to have made the loan or advanced the money on the 6th day of April, 1976:
There is an actual new loan and not simply the continuation of an existing one.
Does this apply to existing loans?
Not as far as section 98 is concerned.
That is very interesting. It is only by way of understanding the full implications of section 115, but what is the meaning of the proviso in subsection (8) which says:
shall not apply to any loan or advance or any part of it which is repaid...
Under section 8 if the loan was made on or after 27th November, 1975 that one is caught unless it is repaid. Loans that were made before the 27th November are not. Is that correct?
Question put and agreed to.
SECTION 116.
Question proposed: "That section 116 stand part of the Bill."
Relief in that case will only be applicable to companies whose accounting year ends after 6th April, 1976?
Yes. Of course group relief is being given extra-statutorily for the present. We are simply bringing it into the statute now so effectively the group relief will be available before 6th April, 1976.
Regarding the extra-statutory business, will they be bothered by subsection (9) which says:
This section shall apply to any accounting period beginning on or after the 6th April, 1976.
as implying that their care and management is in any way disturbed?
No, they will not be so annoyed.
Question put and agreed to.
Section 117 agreed to.
SECTION 118.
Question proposed: "That section 118 stand part of the Bill."
Not unless somebody explains the fractions.
They are self-explanatory. This section defines a claimant company's corresponding accounting period as one which falls wholly or partly within the accounting period of the surrendering company and provides for an appropriate restriction by apportionment on a time basis where periods do not coincide. In those circumstances we must have fractions.
This is a new thing altogether, this A, B, C, D, E, F, thing. When did this start? Did it start with the Schedules to the capital gains tax? Is that the first of the finance measures to have this?
We certainly have them in the capital taxation Bills.
I think it is a very good idea. It saves an awful lot of trouble provided you know what A, B, and C are.
We also had them in last year's Finance Act.
Question put and agreed to.
SECTION 119.
Question proposed: "That section 119 stand part of the Bill."
This section regulates the position in regard to companies joining or leaving a group or consortium. Relief will be given only if the surrendering and claimant companies are members of the same group or consortium during the whole of the surrendering company's accounting period to which the claim relates and during the whole of the corresponding accounting period of the claimant company.
Question put and agreed to.
SECTION 120.
Question proposed: "That section 120 stand part of the Bill."
This section is designed to prevent abuse of group relief where, for example, because a parent company cannot, by reason of insufficiency of profits, benefit from capital allowances or losses of a subsidiary, it transfers the subsidiary to another group in a position to benefit by way of group relief from the subsidiary's losses, and so on. When the subsidiary's losses have been stripped it reverts to the original group. The effect of the section is that where any arrangements are made by which a company may be detached from one group relationship and joined to another group, or where it may be controlled from outside the group, the company is to be treated as having terminated the group relationship.
Question put and agreed to.
Section 121 agreed to.
SECTION 122.
Question proposed: "That section 122 stand part of the Bill."
This section is aimed at preventing abuse in partnerships involving companies in the matter of group reliefs. The section is designed to ensure that relief for losses can be allowed only in respect of a company's share in the partnership profit or loss where the share really accrues to or is borne by the partner company.
That sounds like a change in the law. Of course the whole thing is existing law.
It is a change in existing law.
The whole Part is a change in the law.
Mr. Ryan
The modification of this——
All this is a necessary consequence to giving group relief. We have to make sure it is not going to be abused and that those seeking and taking relief are the genuine groups.
Question put and agreed to.
SECTION 123.
Question proposed: "That section 123 stand part of the Bill."
This section provides for the necessary power to obtain information so that we know what is happening.
Question put and agreed to.
SECTION 124.
Question proposed: "That section 124 stand part of the Bill."
This prevents relief being given more than once.
Do you remember the danger that tax might be imposed more than once, which arose once or twice?
We are taking care to ensure that that does not happen.
Question put and agreed to.
SECTION 125.
Question proposed: "That section 125 stand part of the Bill."
This section supplies the machinery for making claims and adjustments for group relief.
Subsection (2) refers to "the consent of each other member of the consortium". Is there a reason for that? If some company is getting out why should everybody else be required to consent to the making of the claim?
The company that is making the loss available is surrendering something and it is necessary that its sacrifice should be acknowledged by it and agreed to by it.
Question put and agreed to.
SECTION 126.
Question proposed: "That section 126 stand part of the Bill."
We have completed the group relief section and are moving into the capital gains area. Section 126 gives the Revenue right to recover tax from a person who is connected with a company which has made a chargeable gain but the company has not paid tax on the gain within six months of the due date, and the company makes to that person a capital distribution, other than one representing a reduction of capital, which derives from or consists of the disposal of assets on which the chargeable gain accrued to the company. There cannot be much dispute about this.
How does that reconcile with the provision of the capital dividend on which we spent such a long time when considering section 84 (2) (a)?
We are dealing in section 126 with distributions on the winding-up of a company. That is the reason for these provisions and for treating them differently from section 84.
I see, so that it would be better to wind up the old enterprise and to pay capital dividends, or would it? I am sorry if I seem stupid about it. It would be lovely to say "Yes" but I should like to know what I am saying "Yes" to.
I would refer the House to subsection (5) which says what the meaning of capital distribution is for the purposes of this section, the distribution which arises on the winding-up of a company.
Capital distribution has the same meaning as in paragraph 1 (2) of Schedule 2.
Subsection (5) means that any distribution other than a distribution which is income in the hands of the recipient and that would be such a capital distribution on the winding-up.
Capital distribution is any distribution which in the hands of the recipient constitutes income for the purposes of income tax?
When we have a capital distribution under section 126 there is special treatment of it. That treatment is to be discovered by reference to the position of a person connected with a company who receives on or after 6th April, 1976, any capital distribution from the company, other than a capital distribution representing a reduction of capital, and the capital so distributed derives from the disposal after the 5th April, 1976, of assets in respect of which a chargeable gain accrues to the company or the distribution constitutes such disposal of assets. It simply says what the section is applied to. Subsection (2) reads:
If the corporation tax assessed on the company for the accounting period in which the chargeable gain accrues included any amount in respect of chargeable gains, and any of the tax assessed on the company for that period is not paid within six months from the date when it becomes payable by the company, the said person——
That is the chap who got the distribution
——may by an assessment made within two years from that date be assessed and charged (in the name of the company) to an amount of that corporation tax—
(a) not exceeding the amount or value of the capital distribution which that person has received or became entitled to receive; and
(b) not exceeding a proportion equal to that person's share of the capital distribution made by the company of corporation tax on the amount and at the rate charged in respect of that gain in the assessment in which the said tax was charged.
Subsection (3) says:
A person paying any amount of tax under this section shall be entitled to recover a sum equal to that amount from the company.
He has probably gone for his cup of tea at this stage.
Subsection (4) says:
The provisions of this section are without prejudice to any liability of the person receiving or becoming entitled to receive the capital distribution in respect of a chargeable gain accruing to him by reference to the capital distribution as constituting a disposal of an interest in shares in the company.
That is a very special provision for the capital distribution.
It is, but it is a very necessary one, otherwise the tax would be avoided.
I am not against the section, but it clearly relates to assets in respect of a chargeable gain accruing to a company which is obviously out of capital gains tax. It sends one back to that concern already evinced for a capital dividend under section 84, which would seem to bring the recipient, connected or not connected, into the tax treatment whether the chargeable gain had ever arisen.
Under section 84 the distribution would be received as income in the hands of the recipient out of the company's capital profits. Therefore, it will be taxed at the income rate appropriate to the recipient. The distribution referred to in section 126 is one which is not regarded as income in the hands of the recipient—for example, a distribution on a winding-up.
Question put and agreed to.
Progress reported; Committee to sit again.
